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FL: Early Read

Takeaway: Solid qtr as FL heads into a more favorable 2H setup. With $3 in earnings power next year, we expect this one to continue to work higher.


Solid quarter out of FL coming in at $0.38 (adj.) vs. $0.34E and in-line with our $0.38 expectation. Top-line growth of +7.2% despite a -3.4% Fx hit suggest concerns over European performance are in check. Comps came in at +9.8% slightly higher than our +9% estimate and well above consensus (+7%). We’ll get more color on the call (at 9amEST), but we suspect domestic comps came in LDD offset by a slight drag from the international business. We’ll get the customary month-to-date comp update and expect it to reflect an acceleration in sales headed into Q3. In an effort to keep this in perspective, August is the easiest comp of the quarter up MSD last year with Sept up HSD and Oct up LDD.

Gross margins and SG&A both came in a hair better than we expected. We expect merchandise margin to account for the 8bps differential coming in at a wash instead of a drag as management suggested despite higher costs reflecting the strength of current demand and product. SG&A was tightly managed leveraging 122bps against the highest incremental spend last year. We suspect the marketing costs accounted for the difference, but expect that delta to moderate in 2H as we head into the key BTS and holiday selling season.

Inventories marked the eleventh consecutive quarter of a positive sales/inventory spread flat sequentially with Q1 at +10% despite higher cost inventory. This puts FL in a very good position to manage merchandise margin challenges near-term and is gross margin bullish for 2H.

It’s also worth noting that the 2H will mark the first time since 2006 that FL reported an increase in net store openings reflecting slowing domestic closures offset by continued international growth – a positive tailwind given better productivity.

FL has emerged from a significantly more challenging 1H with flying colors printing earnings +12% ahead of expectations in each of the last two quarters. Headed into the 2H we’re looking at easing compares and a period where we expect more opportunity for upside in performance. With $2.50 in EPS now in view this year, we expect this one to continue to work higher as investors start looking out to $3 in earnings power next year (we’re at $2.86 vs the Street at $2.64) and the multiple begins to reflect the fact that this ship is no longer run by Matt Serra, but Ken Hicks.

Casey Flavin



FL: Early Read - FL S




The Macau Metro Monitor, August 17, 2012




In anticipation of the new law that will take effect on November 1, Galaxy has stopped hiring people under the age of 21 to work at its 6 casinos. "We’ve anticipated the change for a long time and there are only a small number of our team members who will be under 21 [when the new law is effective],” Martin said, adding that since there is a transition period allowed by the new law for such casino staff, he did not “expect the [new] law to have any great impact on the business at all”.  Less that 2% of GEG's workforce will be under the age of 21 in November when the law takes effect



A press conference was held yesterday to release the details of an operation that involved the arrest and detention of  303 people between July 9 and August 8.  Dubbed as "Thunderbolt 12", which was conducted under the coordinated efforts of the Macau, Hong Kong and Chinese authorities, the sting was the largest operation undertaken this year raiding local casinos, saunas, karaoke parlors and other venues in an effort to combat "cross border crime, especially concerning drug trafficking, human trafficking, theft, pimping and money laundering”.



Flights were canceled and alerts upgraded in south China on Friday morning, as Typhoon Kai-Tak was forecast to make landfall there around noon. According to the latest updates from China's Central Meteorological Observatory, Kai-Tak was expected to make landfall in the coastal regions between Dianbai and Xuwen counties in southern province of Guangdong, packing a maximum wind speed of 35 meters per second in the center of the storm and bringing downpours.



Exports rose 5.8% in July missing the 6.1% forecast from Dow Jones Newswires poll of economists and represents further slowdown from the 6.6% growth rate in June.  Decelerating growth is attributed to economic struggles in the West, but shipments to China grew.  


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.

The Election

“People can forsee the future only when it coincides with their own wishes, and the most grossly obvious facts can be ignored when they are unwelcome.”

-George Orwell


In life generally and life as stock market operators in particular, our biggest enemy is often ourselves.  As humans, we have mental biases.  As much as we do to train ourselves out of them, they still broadly exist.  In global macro analysis, an important area in which we see biases manifest themselves is political analysis.  Particularly in the United States, people are tied to a political party, so have a difficult time seeing the world outside of that specific lens.


Stepping back, as many of you perhaps already know, in analyzing the top down prospects for a country and in particular the currency, we focus on three key factors: growth, inflation, and policy.  In many instances, the policy and/or perception of future policy is the most critical factor.  In the United States, the President, and his or her party if they control Congress, have the power to set the economic agenda, especially related to fiscal outcomes.  Moreover, they appoint the Federal Reserve Board which has independent (in theory) control of monetary policy.


Understanding this, makes one realize that having a view of politics is important.  The negative thing about analyzing politics, as I noted above, is that most people have their partisan biases.  The positive aspect is that there is a lot of data to help us establish an unbiased view.  This morning I’m going to spend some time going through the relevant data.  That said, I’ll get to the punch line: Obama has the consistent edge.  That might not make everyone happy, but that is a fact for now. 

  1. National Polls – There have been six major national polls in August that look at Obama versus Romney in the general election.  In aggregate, Obama has won four of these polls and his average edge over Romney is +3.5 points.  Since the margin of error for these polls collectively is right around 3.0, this is a statistically significant edge.  On the positive side of the spectrum, in the last two major polls, Romney has a slight edge, which may be indicative of some positive momentum from the Ryan announcement.
  2. Electronic Predictive Markets – The most prominent electronic predictive markets that have a contract that enables people to “bet” on the outcome of the Presidential election are Intrade and the Iowa Electronic Markets.  On Intrade, Obama currently has a 56% to 43% edge over Romney.  On the Iowa Electronics Market, Obama has a slightly more superior edge at 60% to 39%.  Both of these markets measure the probability of either candidate getting elected.
  3. Economic Projections – Once again the key economic models that we look at, our own Hedgeye Election Indicator and Yale Professor Ray Fair’s model, both show a higher probability that Obama gets re-elected than Romney winning the Presidency.  Currently, on the Hedgeye Election Indicator, which uses real time market and economic data to predict an outcome for the election, we have a 59.5% probability of Obama getting re-elected.  Currently on Ray Fair’s model, a model that focuses on growth and growth surprises as the primary factors, the Democratic candidate is predicted to win 49.5% of the vote and the Republican candidate to get 46.3% of the vote. 

On these broad national indicators, Obama has an edge, even if a slight one.   The closeness of the aforementioned indicators suggests that this election will once again come down to the key battleground states and the overall electoral college map.


Based on the most recent polls, Obama has 237 electoral college votes and Romney has 191 electoral college votes.  This is based on state level polls that are outside the margin of error.  Even as Obama has an edge, 270 votes are needed to obtain the Presidency, so his edge is simply that, an edge.  The states that remain in the toss up category combine for 110 votes and include: Colorado, Florida, Iowa, Nevada, New Hampshire, North Carolina, Ohio, Virginia, and Wisconsin.   Ultimately, this election will be won or lost in those states.


For those of you who haven’t stopped reading and gotten bored because of my political meanderings this morning, you probably think that I’m painting a negative picture for Romney.  And on some level you are correct, although I’m not painting but rather just relaying the facts.  In that vein, there are a couple of facts that also auger positively for Romney – Obama’s approval rating and voter engagement.


In terms of approval rating, Obama’s approval rating is low for a President that hopes to get re-elected.  According to Gallup, the most long running pollster in this category, Obama’s approval rating is currently 45 and his term average is 49.  The only Presidents with lower approval ratings were Truman, Carter, and Nixon.  Obviously, this not an enviable bunch and an approval rating that is broadly indicative of dissatisfaction with the Obama administration.


The more interesting wild card in this election will be voter engagement.  This is the factor that led to the Republicans doing much better than expected in the midterm elections.  As well, this is likely a key reason that Romney selected Paul Ryan, a conservative and Tea Party favorite, to motivate the base.  Getting out to your base is from Karl Rove’s electoral strategy 101 and is a fundamental reason why George W. Bush won two elections.


So, not to pour cold water on the positive picture I’ve just painted above for partisan Democrats, but early indicators suggest that Republicans may be much more engaged that Democrats this electoral cycle.  The most recent evidence  comes from a USA Today / Gallup poll earlier this week which showed that 74% of Republicans are thinking “quite a lot” about the election, while only 61% of Democrats are doing the same.  This may be a meaningful and relevant edge for the election.


This election is likely to be tight, with Obama having a slight edge currently, but Romney has a number of factors that could swing his way, especially as he begins to outspend Obama this fall.  Some suggest he may be able to outspend Obama almost 2:1 in key states.  Regardless of your political affiliation, as a stock market operator if you get policy right, you will get a lot of other things right.  And policy starts with politics.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Election - Chart of the Day


The Election - Virtual Portfolio

Sucker Economics

This note was originally published at 8am on August 03, 2012 for Hedgeye subscribers.

“Markets are increasingly distorted by central banks’ attempts to squeeze drops of growth…”

-Louis Bacon


What do Louis Bacon, Stan Druckenmiller, and George Soros all have in common? They’re some of the best players in this Global Macro game, and they’re all either giving money back to their investors or getting out of the game completely.


They think these central planners are right nuts. So do I. But does the manic media that perpetuates this entire gong show get that? Have these pundits ever traded a macro market in their life? Or, like the worst players at a poker table, are they just the suckers trying to remain relevant until their ratings and/or credibility goes to zero % too?


As the old saying goes, look around the poker table; if you can’t see who the sucker is, you’re probably it.


Back to the Global Macro Grind


We got longer yesterday (cutting our Cash position to 58%) but it was still a clean cut example of what Louis Bacon coined in a recent letter (explaining why he is giving back $2B to his investors) as Disaster Economics: “where assets are valued based on their ability to withstand a lurking disaster as opposed to what they may yield or earn, is now the prism through which investors are pricing markets.”


Don’t think this is turning into a Q308 like disaster? Ok. What would you call this?


1.   745AM EST (yesterday), Spanish stocks rip to the upside, +2% on the day, after the ECB decides not to cut rates, but plenty of print, tv, and radio pundits proclaim their faith that “it’s at 830AM that we get the good stuff.”


2.   835AM EST (yesterday), Spanish stock stop going up, and fast, as pundits comb the release looking for “hints” that the ECB really is going to deliver the drugs, like Bernanke was supposed to in the day prior.


3.   1130AM EST (yesterday), Spanish stocks close down -5.2% on the day, a 7% (not a typo) intraday reversal. Pundits feel shame.


Or do they? 430AM EST, I get up this morning and “European stocks rally” on new news that Spain (as in the country) is going to hold a press conference about something.


I couldn’t make this up if I tried.


Notwithstanding the simple math of the matter (a market that loses 7% of its value needs to “rally” +7.5% to get whoever got suckered in at 830AM EST yesterday back to break-even), I’d say Bacon is on to something here.


Then you have the other running narrative of people who are in the business of markets going up saying “but the SP500 is up 10% for the year-to-date.” That one is just a beauty – it’s as if people think about their life-long net wealth on the same calendar as Old Wall Street’s bonus season.


Just to get the record straight – and I mean how real people with real money think about the return of their moneys:

  1. SP500 is not +10% YTD anyway, it’s up +8.5%
  2. SP500 is down -3.8% from Q1 2012 (when #GrowthSlowing started)
  3. SP500 is down -12.8% from its 2007 high, where almost everyone of the Q1 2012 bulls were the same people

So, lucky you – you only have to be up +4% and +15% to get back to your 2012 and 2007 break-evens. This better be one heck of a US Employment Report this morning.


Better yet, if you’ve noticed this other little thing called a broad leading indicator (the Russell 2000 has led the SP500 the entire way):

  1. RUSSELL2000 is only up +3.6% YTD
  2. RUSSELL2000 is down -9.1% from its 2012 Perma-Bull high (March 26th, where the VIX bottomed at 14.26)
  3. RUSSELL2000 is down -6.1% in the last month alone

I know, I know. Don’t be spinning that storyline on us KM, we’re still living large over here on the everything fine front. Until you aren’t. What’s happened this year at MF Global, JP Morgan, and Knight Capital is an obvious reminder of Disaster Economics too.


As returns (both buy and sell-side) get tougher to concoct, we’ve created a culture on Old Wall Street of cheating and corner cutting so that people A) don’t get ridiculed by their peers internally and/or B) get paid.


That pressure is cultural.  It’s also called causality. Much like central planning policies to suspend economic gravity, it’s only sustainable until it goes away.


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Spain’s IBEX, and the SP500 are now $1590-1605, $105.09-107.32, $82.95-84.11, $1.20-1.23, 5811-6649, and 1356-1376, respectively.


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Sucker Economics - Chart of the Day


Sucker Economics - Virtual Portfolio


Takeaway: LVS's Mass exposure somewhat insulates it from the VIP volatility in Macau

Who's best positioned to weather the VIP storm?



  • LVS mainains the highest Mass exposure as measured by the percent of its total gaming revenue (GGR) in Macau derived from that high margin segment
  • VIP has been volatile and turned negative in July.  We continue to expect that segment will come under pressure.  Wynn and Galaxy are most exposed.
  • After a big VIP push - mainly through its Four Seasons property - Mass once again drives over 40% of LVS's Macau GGR following the opening of Sands Cotai Central.



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 80.48%
  • SHORT SIGNALS 78.35%