SNAP: Food Stamp Participation Decelerates

Takeaway: Dollar stores like $FDO and $DG rely on customers using food stamps to boost revenue. Fewer people on food stamps is a negative for them.

One of the most unique metrics out there is the Supplemental Nutrition Assistance Program (SNAP) participation rate. SNAP is a fancy term for food stamps and the rates had peaked a few months ago with nearly 15% of the country enrolled in SNAP. The latest stats dropped yesterday and participation growth is continuing to decelerate.


One sector that relies on a high SNAP participation rate is dollar stores. Think about it: dollar stores are basically taking in a boatload of federal cash as people on food stamps hit up Dollar General (DG) and Family Dollar (FDO) for their milk, bread, beans and other necessities. It’s been a boon for dollar stores, helping to drive comps, sales and traffic. If the SNAP participation rate continues to decline at an accelerating rate, dollar stores will likely see a decline in the aforementioned metrics unless they can make up for the lost SNAP customers.



SNAP: Food Stamp Participation Decelerates - SNAPrates


Unlimited Possibilities







Central planners around the world are a force like no other. The amount of power they have and how quickly they can use it (intentionally or unintentionally) is astounding. So it should come as no surprise that this morning, Super Mario Draghi came out and basically said “let’s rock!” The plan is that the ECB will begin an “unlimited” bond buying program. Never mind the 8 to 10 handles the S&P 500 futures ripped before the open; slowing growth on a global scale seems to be what everyone is looking for these days. Whatever it takes, right?




With the central planner cartel getting ready to do some serious bond buying and undertake equally bodacious easing measures, the focus has now turned to gold for many investors. Drive down the US dollar, gold goes up and vice versa. Makes sense as we believe growth is slowing and will continue to do so for some time unfortunately. Here’s Keith’s thesis, word for word, on why he’s short gold even with this morning’s massive rip to the upside:


“I’m short Gold here. On balance, until turning bearish on Gold in Q1 of 2012, I have been a Gold bull since 2003. I have #timestamped 35 long/short positions in the GLD since founding the firm in 2008 (been right 30x). 


The more wrong I am on Gold (from here), the more right I’ll be on #GrowthSlowing.”




You’ve probably heard this one before but we’ll continue to repeat it with no end in sight. It’s simple. You need to manage the risk and the range for any trade. If you are trading the S&P 500 and you know resistance is t 1407 and support is at 1398, well then you’re going to trade within that range and any deviation outside that range will make for a big move. Risk is simple. Too much is a bad thing, too little not a good thing. Get it together and figure out a risk level you’re comfortable with.






Cash:                  UP


U.S. Equities:   DOWN


Int'l Equities:   DOWN   


Commodities: Flat


Fixed Income:  Flat


Int'l Currencies: Flat  








Nike’s challenges are well-telegraphed. But the reality is that its top line is extremely strong, and the Olympics has just given Nike all the ammo it needs to marry product with marketing and grow in the 10% range for the next 2 years. With margin pressures easing, and Cole Haan and Umbro soon to be divested, the model is getting more focused and profitable.

  • TAIL:      LONG            



Emissions regulations in the US focusing on greenhouse gases should end the disruptive pre-buy cycle and allow PCAR to improve margins. Improved capacity utilization, truck fleet aging, and less volatile used truck prices all should support higher long-run profitability. In the near-term, Paccar may benefit from engine certification issues at Navistar, allowing it to gain market share. Longer-term, Paccar enjos a strong position in a structurally advantaged industry and an attractive valuation.

  • TAIL:      LONG



LVS finally reached and has maintained its 20% Macau gaming share, thanks to Sands Cotai Central (SCC). With SCC continuing to ramp up, we expect that level to hold and maybe, even improve. Macau sentiment has reached a yearly low but we see improvement ahead.

  • TAIL:      NEUTRAL







“How one economist created the most realistic fantasy football league ever” -@TheAtlantic




“Conscience is the inner voice that warns us somebody may be looking.” –H.L. Mencken




Samsung’s Galaxy S III smartphone usurped Apple’s iPhone 4S as the top selling smartphone in the US for the month of August. That is expected to be short-lived with Apple announcing its next-gen iPhone on September 12.


Takeaway: Maybe less so over the near-term, but the performance of the China stock market impacts Macau gaming revenues.

Our statistical analysis has found that Mass gaming revenues and VIP volumes lag the Shanghai Stock Index (SSE) by 4 and 3 months, respectively.  That is, the YoY change in Chinese stocks is a statistically significant driver of the YoY change in Macau gaming revenues (GGR), albeit on a lag.  The upshot here is that while we still believe we are above consensus expectations for the rest of the year, based on the recent performance of the SSE, there could be 1-3% downside to our monthly YoY GGR projections. 




We’ve seen and authored studies in the past that showed no correlation between the Shanghai Composite and Macau gaming revenues (GGR).  An astute client of ours recently suggested that Macau could follow the same pattern as a number of US-based industrial companies that saw their China business lag the Chinese stock market.  The theory is that the SSE is a discounting mechanism that leads China's economy up or down which in turn contributes to or detracts from gaming revenues in Macau.


The good news is that July was such a poor month and the stocks have already taken a beating.  Moreover, when we plug the SSE impact into our model, it only reduces YoY growth by 1-3% depending on the month, as can be seen in the chart below.  However, we would be concerned if the SSE continues to fall.  Our near-term outlook (Trade) for Macau stocks is favorable, particularly LVS, but if the SSE falls further, that would bring some uncertainty into the intermediate or Trend call.  Our long term (Tail) view remains positive.



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LULU: Math Matters

Takeaway: It’s critical to delineate between the brand, company and stock for a name like $LULU, which has great returns, but eroding oper metrics.

Conclusion: Let’s remove the emotion and look at the raw math behind one of the most perennially loved names in retail. It’s critical to draw delineation between the Brand, the company and the stock. We'd avoid it.



It’s so easy to like LULU.

But we have to draw a massive delineation between…a) Lululemon the Brand, b) Lululemon Athletica the company, and c) LULU the stock. The first one is great. The second is good. And the third is below-average at best.


The Long term/TAIL, growth is there for this company if it properly allocates capital into fulfilling the Brand opportunity. This is a mere $1.2bn brand (closer to $600-700mm wholesale equivalent in comparing to the NKEs and UAs of the world), and there’s no reason why it can’t get to $3-$4bn over 5-years if it continues to execute. The key here is that if you look at share of the Yoga market, and what those revenue numbers suggest, it implies that LULU will own over 100% of the Yoga space. Clearly that’s not possible. But when you look at great brands in the past, they have continually proved investors wrong by creating new spaces and filling them with product ideas that most folks like you and I cannot even foresee. LULU is one of those companies.


BUT…And it’s a big ‘but’. When we remove all the emotion around the cult stock status it’s been awarded and simply look at the math, we can’t get our hands around the eroding productivity of existing assets.


By all means, we give LULU the credit it deserves for 100%+ returns on capital. But this is by way of churning out 7x+ asset turns on 25%+ EBIT margins. Maybe one of these factors is sustainable. But if LULU sustains both – as it is priced to do – then it will be the first company in recent memory to do so, aside from Apple. Sustaining both would suggest that there is something so special about it that it is massively undervalued even at current levels. So the simple question is really – “Is LULU = AAPL?” As great as it is, we’d give that one a definitive ‘No’.


While we’re believers in the concept and the brand, we can’t make the leap to assume that it can prevent a continued rollover in new store productivity. And in fact, we’re surprised that more attention has not been paid to the issue.

Here’s some geeky math on our thought process around the different between reported comps and the change in total sales/square foot. …


Let’s assume that…

1) total store sales yy chg = (chg in comp store sales growth/square foot + new store sales/square foot) + (yy chg in comp store size + chg in new store size).

2) Therefore yty % chg comp sales = (chg in all stores revenue/sq' - chg in new stores revenue/sq') + (change in all stores size - change in new stores size). Of course, the figures within the parens must be weighted by the number of stores.

3) If store size is basically unchanged then comp growth and the YTY % chg in sales/sq' in comparable stores should be the same.  in other words, comp growth = revenue/sq' growth in comp stores, when store size is unchanged.

4) therefore the difference between reported comp growth in each quarter and the YTY chg in all store sales/sq' in the same quarter will be the YTY % change in sales/sq' at new stores.  Again, in mathematical formula form:

comp stores sales growth - yty chg in all stores revenue/sq' = yty change in new stores revenue/sq' (again weighted by the number of new and comp stores)

5) But backing this number out, yields increasingly negative growth rates in new store revenue/sq', so what are we missing?

Using 1Q12 as an example:

comp growth (GAAP): 24%

YTY chg average sales/sq in all stores: 11%

YTY % chg in average store size: 1%

Residual: 12%

number of non comp stores: 42
number of total stores at qtr end: 180


  11%=(138/180) x 24% + (yty chg in new store revenue/sq' x (42/180))

11%= 18.4% + (.223 x yty chg in new store revenue/sq')
(11%-18.4%)/.223 = yty chg in new store sales/sq'
-31.7% = yty chg in new store sales/sq'


In looking at these numbers on the heels of implied new store productivity going from 175% in 2010, to 95%in 2011, and then down another 30% in 1Q12, we think that we’re going to need to see a massive ramp in comp in order to offset this trend.


Maybe what we’re missing is the impact of, and the quirky accounting therein. Regardless, we’re going to point back to the simple ROIC calculation. Can the business grow faster than productivity at existing stores will erode? We’re not so sure. If that’s the case, then either asset turns or margins are coming down. That means that ROIC comes down. That means that a 30x+ p/e multiple matters again.


Will all of this come out with tomorrow’s print? Maybe. Maybe not. But we definitely would not touch the stock in advance of the quarter.The downside if this trend perpetuates is far worse than the upside would be if it reverses.


If I gave Keith the fundamental OK, he’d likely short this stock in a heartbeat.


TODAY’S S&P 500 SET-UP – September 6, 2012

As we look at today’s set up for the S&P 500, the range is 16 points or -0.39% downside to 1398 and 0.75% upside to 1414. 











  • ADVANCE/DECLINE LINE: on 09/05 NYSE -148
    • Decrease versus the prior day’s trading of 541
  • VOLUME: on 09/05 NYSE 675.64
    • Increase versus prior day’s trading of 5.70%
  • VIX:  as of 09/05 was at 17.74
    • Decrease versus most recent day’s trading of -1.33%
    • Year-to-date decrease of -24.19%
  • SPX PUT/CALL RATIO: as of 09/05 closed at 2.15
    • Up  from the day prior at 1.17


  • TED SPREAD: as of this morning 30.84
  • 3-MONTH T-BILL YIELD: as of this morning 0.10%
  • 10-Year: as of this morning 1.62%
    • Increase from prior day’s trading of 1.60%
  • YIELD CURVE: as of this morning 1.38
    • Up from prior day’s trading at 1.36

MACRO DATA POINTS (Bloomberg Estimates)

  • 7am: Bank of England monetary policy committee decision
  • 7:30am: Challenger Job Cuts Y/y, Aug. (prior -44.5%)
  • 7:45am: ECB ann. interest rates; governing council meets
  • 8am: RBC Consumer Outlook Index, Sept. (prior 46.4)
  • 8:15am: ADP Employment Change, Aug., est. 140K (prior 163k)
  • 8:30am: Init. Jobless Claims, 9/1, est. 370k (prior 374k)
  • 9am: U.S. announces plans for sale of 3-year notes, 10-year notes, 30-year bonds
  • 9:45am: Bloomberg Consumer Comfort, Sept. 2 (prior -47.3)
  • 10am: ISM Non-Manuf. Composite, Aug. est. 52.5 (prior 52.6)
  • 10am: Freddie Mac mortgage rate survey
  • 10:30am: EIA natural gas storage
  • 11am: DoE weekly inventories
  • 11am: Fed to purchase $1.5b-$2.0b notes due 2/15/2036-8/15/2042
  • ICSC Chain Store Sales Y/y, Aug. (prior 1.9%)


    • Democratic National Convention in Charlotte, N.C.; Obama will formally accept his party’s nomination for president, outline his goals for nation
    • Bill Clinton nominated Obama for re-election at DNC
    • Fed releases financial disclosure forms of Chairman Ben Bernanke, other board members, 10am
    • House, Senate not in session
    • Negotiators for U.S., eight other Pacific-rim nations will tackle protections for intellectual property, such as pharmaceuticals, in talks in Leesburg, Va., through Sept. 15


  • Draghi credibility at stake as mkts look to ECB to save euro
  • Supervalu to close 60 stores, take pretax charge
  • Growth in U.S. service industries probably eased in August
  • Clinton nominates Obama for re-election at Democratic Convention
  • AIG selling about $2b of AIA Group shares, terms show
  • Australia jobless rate unexpectedly falls, boosts currency
  • Spain sells EU3.5b of debt, meeting maximum target
  • Qantas allies with Emirates on Europe flights, ditching BA
  • Apple rivals try to outshine next IPhone with cool features
  • Amazon readies Kindle Fire update to keep up with Apple, Google
  • Apple urged by China dissident to act against one-child rule
  • Goldman Sachs sued by BayernLB over losses on mortgage bonds
  • Health Net ties to veteran-owned firm probed by agency watchdog
  • Apple TV no IPhone as talks bog down with media companies
  • Bloomberg Canada-Asia Dialog includes talk by Canada PM Stephen Harper


    • Navistar International (NAV) 6am, $(1.41) - Preview
    • Descartes (DSG CN) 6am, $0.14
    • Transcontinental (TCL/A CN) 7am, C$0.42
    • UTI Worldwide (UTIW) 8am, $0.23
    • Hovnanian (HOV) 9am, $(0.14) - Preview
    • North West Co (NWC CN) 10:01am, C$0.36
    • Quiksilver (ZQK) 4pm, $0.06
    • Ulta Salon Cosmetics & Fragrance (ULTA) 4:01pm, $0.51
    • Mattress Firm Holding (MFRM) 4:01pm, $0.28
    • Cooper Cos (COO) 4:01pm, $1.29
    • Infoblox (BLOX) 4:14pm, $0.01



GOLD – the more wrong I am immediate-term on short gold is the more right I’ll be on #GrowthSlowing – one perpetuates the other; Oil back up to $114 this morning as Gold gets pinned at a lower-high vs Feb with a singing -0.91 immediate-term correlation to Down Dollar, Up Euro.


COPPER – all the while, the Doctor doesn’t seem to care much for the gong show either (down this morning, failing at long-term TAIL risk support of $3.85lb, well off its $3.95 high made in Feb).

  • Hurricane Leslie Strengthens En Route to Bermuda, Canada
  • Platinum Buying Expands as Mining Strikes Escalate: Commodities
  • Gold Gains to Highest Since March as Euro Rallies on ECB Plan
  • UN Sees No Reason for Food Crisis as Prices Stabilize in August
  • Oil Rises a Second Day on U.S. Supply Drop, ECB Plan Optimism
  • Soybeans Drop to One-Week Low as U.S. Harvest May Top Forecast
  • Copper Trades at $7,686 a Ton as ECB Leaves Rates Unchanged
  • Goldman Sachs’s Currie Says Commodities May Jump Another 10%
  • Cocoa Reaches 11-Month High Even as Rains Improve; Coffee Falls
  • Rubber Advances as European Central Bank May Act to Tame Crisis
  • Jefferies Aims for Top Five Ranking on the London Metal Exchange
  • Cars Beating Plastics Makes Asia Gasoline Winner: Energy Markets
  • Asia Naphtha Profits Fall; Fuel-Oil Losses Narrow: Oil Products
  • Platinum Buying Expands Amid Mining Strikes
  • Goldman Sachs’s Currie Says Commodities May Advance Another 10%
  • Palm-Oil Veteran Mistry Says Indonesia Has ‘Hidden’ Reserves
  • Palm Oil Drops to Lowest Level in Three Weeks on Higher Supplies














ASIA – Asian equity markets don’t seem to care much for this Western central planning gong show anymore; the higher expectations for money printed from the heavens get, the lower real inflation adjusted growth expectations go – pretty simple; Japan was flat, HK +0.34%, and Singapore was -0.3%; doing nothing, treading on 6wk lows.










The Hedgeye Macro Team

Faustian Investing

This note was originally published at 8am on August 23, 2012 for Hedgeye subscribers.

“In the end, you are exactly—what you are. Put on wig with a million curls,

Out the highest heeled boots on your feet, Yet in the end you remain just what you are.”



Today is August 23rd.  To many of you stock market operators, it is just another day of finding compelling investments and tweaking those market exposures.  But for those of you who didn’t know, it is also National Compliance Officer Day.  So take a few minutes and go see that guy or gal who runs your compliance department, who you typically like to avoid, and give them a big thank you.


One of the first hires at Hedgeye was our compliance officer, Rabbi Moshe Silver.  Not only would I put his knowledge of the compliance up against anyone’s, but he is also kind of funny.  By kind of I mean he tells jokes, even if they aren’t all funny.  In all seriousness, Moshe, on behalf of all of us, thank you for your fine work as our compliance officer and teammate.


Now that I officially have my compliance officer off my back for a few months, let’s get back to the global macro grind.  A topic I want to start with today is China.  Maybe you’ve heard of it? It’s the country that has taken a massive amount of economic market share over the last two decades.  I just wanted to flag a few interesting nuggets from China over the last couple of days.  They are as follows:

  • Chinese iron ore prices are at their lowest levels since 2009 and mills are beginning to default on supply contracts;
  • Zhang Honxia, chairman of China’s largest cotton-textile maker, said: “The Chinese economy is only at the beginning of a harsh winter.  We are in worse shape now then compared with 2008-2009.”;
  • Iron ore output in China is down 8.1% in July;
  • The Shanghai Composite hit a three-year low yesterday;
  • Japanese exports to China in July were -11% year-over-year; and
  • The IMF has estimated that China’s capacity utilization has fallen to just 60% versus 80% in the pre-crisis era.

To be clear, I didn’t hand pick those data points to paint some bearish mosaic.  They are actually just what I wrote down in my notebook and, candidly, they are a little depressing as it relates to Chinese growth.


Last night’s PMI readings were of similar nature, if not worse, for China.  In aggregate, the PMI for August fell to 43.0 from 45.1 in July.  The specifics were even more dreary, new orders fell to 46.6 from 48.7, new export orders slumped to 44.7 (the lowest reading since the financial crisis), and inventories rose to 53.6.  Inventory up and orders down are a toxic mix for any company, let alone the world’s second largest economy.


Despite this plethora of negative data points, the equity markets keeps grinding higher.  Perversely, bad news is good news because bad news means more central bank easing.  The only term I can really think of for this type of investing (and no offense to those of you that are profiting from it) is Faustian Investing.


As many of you know, Faust is a protagonist in a classic German legend.  He is a very successful scholar, but like many successful people, he wants more.  As a result, Faust makes a deal with the devil and exchanges his soul for unlimited knowledge and worldly pleasures.  To me, buying equities at a VIX of 15.1 on hopes of further easing from central bankers feels like a deal with the devil.  Incidentally, there is a gentleman named Jon W. Faust who is a special advisor to the FOMC Board of Governors.  And I couldn’t make that up even if I wanted to …


Speaking of easing, many have asked our view of whether some incremental news on the monetary policy front could come out of Jackson Hole next week.  I will touch on that in a second, but let me just start with this, it is likely priced in.  The SP500 is up 11% in almost a straight line from the lows of the summer into Jackson Hole.  And from interacting with our many subscribers and even more followers on social media, this is the “catalyst” people are talking about.


Now, as to whether the Fed will actually do anything next week is a different question.  The key economic takeaway yesterday from the release of the FOMC’s minutes was that, “economic activity increased at a slower pace in the second quarter than earlier in the year and that labor market conditions had improved little in recent months.”  So as a result:


“Many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery.” 


There you have it: the Fed is poised to ease!  I’m just not sure it will be at Jackson Hole next week.  The last time Bernanke announced action at Jackson Hole was QE2 in 2010.  At that point, equity markets had undergone a serious two month sell off, the government had just lowered its reading Q2 2010 GDP growth to 1.6%, and broad economic indicators were more anemic than they are now (we will have a detailed post on this later today). 


So in summary, we think any potential action at Jackson Hole is both unlikely and also priced into equities.  To express this from a non-Faustian investing perspective, yesterday in the virtual portfolio we bought the U.S. dollar and shorted gold.


The greater question, though, is whether incremental easing will have any impact on economic activity. In the Chart of the Day below, we show both major recent Fed policy announcements in Q3 2007 and Q3 2010 and subsequent global economic activity.  In both instances, growth slowed and inflation accelerated.  Be careful what you wish for from those devilish central bankers.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, 10yr UST Yield, and the SP500 are 1621-1679, 113.71-116.12, 81.41-82.11, 1.23-1.25 (TREND resistance = 1.26), 1.66-1.75% and 1410-1419, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Faustian Investing - Chart of the Day


Faustian Investing - Virtual Portfolio

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 80.46%
  • SHORT SIGNALS 78.35%