Weak Dollar Crowd

This note was originally published at 8am on August 29, 2012 for Hedgeye subscribers.

“The fact that this policy failed spectacularly in 1973 did not deter the weak-dollar crowd.”

-Jim Rickards


If my sell-side competition thinks I am going to back down on how Dollar Debauchery has perpetuated the US and Global Economic slowdown via commodity inflation in 2012, they better think again.


The Weak Dollar Crowd’s case for “strong exports” and an “up market” (on no volume or fund flows) is weakening. The Strong Dollar, Strong America solution I introduced in December 2011 (when I was bullish on US growth and stocks) is strengthening.


Make no mistake, I am at war with the Keynesians – it’s what Jim Rickards has coined the Currency War, “The Making of The Next Global Crisis.” Jim will be doing a conference call with our Global Macro Team today at 11AM EST (email for access).


Back to the Global Macro Grind


With a Navajo chant, shots were fired from New Haven on August 16th, 2012. That’s when we said sell stocks and buy bonds. If the Weak Dollar Crowd bought stocks at 1426 SPX and sold bonds with the 10yr US Treasury yield at 1.89%, they should feel shame.


But they don’t. In fact, some of these strategists and economists from the Old Wall are shameless. That’s not being rude – that’s the truth. How else should I describe their March 2012 consensus US and Global GDP estimates being off by 45-70%?


Oh, but “stocks are up” for the YTD, so you don’t have to get anything fundamental right about growth or how money printing infects it to take a half-baked victory lap in this business at short-term tops, right?


That’s ending folks. The People don’t trust broken sources. Market volumes speak louder than their words.


Got data to support the Weak Dollar Crowd weakening?

  1. GROWTH: this morning you’ll get Q2 2012 US GDP growth reported down at least 60% from where it was in Q4 2011 (4.10%)
  2. INFLATION: real-time inflation that drives down real (inflation adjusted) Consumption Growth is ripping, sequentially, in August
  3. CONFIDENCE: yesterday’s US Consumer Confidence number for August was down -8% month-over-month vs July’s 65.9 reading

That’s right “stocks are up” fans, the US stock market is up over +2% for August… and the American People don’t care. That’s because of the math – when Growth Slows and Inflation Accelerates, real consumers get squeezed.


Pardon? What happened? Why didn’t people forget about needing to be up +13% (from here in the SP500) to get their 401k super stock market allocations back to break-even? Didn’t they make a 100% equity allocation to the AAPL ETF?


This isn’t funny anymore. Neither were the 1970s.


In the 1970s you had a less politicized version of Ben Bernanke (Fed Chief Arthur Burns, who didn’t do the TV and print thing) work towards Dollar Debauchery and Debt Monetization under both a Republican and Democrat boss (Nixon and Carter).


Today, it’s worse – and not because Bernanke did the same for Bush/Obama – more so because the Europeans have their own currency this time and are trying to do precisely what the Japanese did.


Overlay those conflicted and compromised political policy “plans” driving the Dollar, Yen, and Euro with what #BailoutBeggars are asking the Chinese to do next (“PRINT LOTS OF MONEY” – Paul Krugman to Japan 1997), and the weakness of the weak is looking weaker.


It’s not different this time. Currency Wars have always been global. Rickards will expand on that with us today.


In other news this morning:

  1. Chinese stocks fell another -1% last night, right back down to their YTD lows (-16.5% since May)
  2. Indian and Indonesian stocks both snapped their immediate-term TRADE lines of support, down -0.6% and -1.4%, respectively
  3. EuroStoxx50 finally broke its immediate-term TRADE (squeeze) line of 2466
  4. Germany’s DAX and Spain’s IBEX sliced through their respective TRADE lines of 7016 and 7416 as well
  5. Russian stocks lead decliners, down -1% this morning (down -19% from the March #GrowthSlowing top), with Oil down
  6. Spain’s 5yr CDS just peeked its head back over the 500 line (1st time since August 13th)
  7. Gold failed at its long-term TAIL risk line of 1679 resistance, again, and continues to make lower-highs
  8. 10yr US Treasury Yields have effectively collapsed (-14% in less than 2wks) back down to 1.62%
  9. US Treasury Yield Spread (10yr – 2yr) is down 18bps since our call on August 16th to buy bonds (that’s a lot)
  10. Draghi wrote an Op-Ed about something I can’t understand

This globally interconnected gong show of central planning rumors still looks Too Big To Bail to me. Weak (failed) policy makers are looking weaker. Strong real-time risk management processes are getting stronger.


My immediate-term risk ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, 10yr UST yield, and the SP500 are now $1648-1679, $111.54-113.98, $81.11-81.96, $1.24-1.26, 1.58-1.65%, and 1402-1419, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Weak Dollar Crowd - Chart of the Day


Weak Dollar Crowd - Virtual Portfolio

Rhyming 2008

“History doesn’t repeat itself, but it does rhyme.”

-Mark Twain


Some prominent Western academic economists (Keynesians) tend to go with the “feel” thing on US and Global GDP growth. It “feels like 3-4%” is something that we’ve heard almost every year since 2006.


So how does it feel to you? To me, if I had to make a call on it, it definitely feels like it’s September. It feels like the sun probably rises in the East this morning too. On the year-to-date thing, I’m not sure if it feels like 1987, 2007, or 2008.


In September of all those years, something was different. In September 2007, growth slowed and companies started to miss. In September 2008, expectations ramped for a bigger and bigger Paulson bazooka bailout. And for those of you who remember what came after September 1987 (October 19th, down 23% in a day), it was just a blip, because stocks did close “up year-to-date.”


Back to the Global Macro Grind


If you boil down all 3 of those periods, in terms of isolating central planning expectations, it’s tough to not feel anything that rhymes more than 2008. For Hank Paulson, TARP was supposed to be $250B, then $500B, then $800B (by October Paulson was bent over his garbage can). For Bernanke, 0% rates were supposed to run until 2012, then 2013, then on January 25th he had to move the goal posts to 2014.


Now what? Will Buzz Lightyear Bernanke go to 2015, then infinity, and beyond?


Apparently the Europeans will do “whatever it takes”, so why not? It’s only going to get us $130-150 Oil and an even faster Global Growth Slowdown than when Bernanke pushed Oil to $125 (Brent) in February.


Expectations matter. And these central planners will be held accountable for it this time – that’s not different. On that score, here are 3 top headlines (expectations) from this morning:


1.       “Fed Seen Starting Qe3 While Extending Rate Pledge to 2015”

2.       “Stimulus to Reverse Commodity Bull to Bear Fastest Since 2008”

3.       “China’s Stocks Advance After Premier Wen Signals Stimulus”

Isn’t this centrally planned market thing exciting! If I’ve written this 100s of times this year, I may as well have written it 1000s and then walked right up close to you in March and yelled it in your ear with a government manufactured mega-phone:




Whatever the Europeans promised this morning might matter to where the last bottom-up turned macro hedgie capitulates on his European shorts, but it will not change the only thing that will change any of this – economic growth.


Across the board, August inflation data in Europe was as follows:

  1. France CPI +2.4% (vs 2.2% in JUL)
  2. German CPI +2.2% (vs 1.9% in JUL)
  3. Spain CPI +2.7% (vs 2.7% in JUL)

Now, remember, the Spanish government just admitted to making up their GDP growth numbers for the last few years, so don’t think for a New York day traded minute that they aren’t suppressing real-life inflation on a reported basis like Bernanke does.


What you have now in Europe is called stagflation (growth slows to flat/negative year-over-year while inflation accelerates sequentially month-over-month). Anyone who tells you $116 oil, $7 corn, and $60,000/yr to go to Yale is “deflationary” needs their head read.


To review the core components of our Global Macro Model and why we have had Growth right in 2012:

  1. Growth is either slowing or rising, sequentially (quarter over quarter)
  2. Inflation is either slowing or rising, sequentially (month-over-month)
  3. Policies to Inflate expectations are either rising or falling which, in turn, perpetuates 1 and 2

If you need to know why people who didn’t blow up in 2008 keep flowing out of Equity Funds intuitively get this, look no further than the broken sources perpetuating policy expectations: forecasters at the US Federal Reserve.


In our Chart of The Day, you can see team Bernanke’s forecasting track record on US GDP:

  1. Pre having to do QE2 at 2010’s low (he thought QE1 was the elixir for growth), he was certain US Growth was going to be 4%
  2. Post being wrong on what QE2 would do for US employment and economic growth, he kept dropping his estimates
  3. Currently, he’s been  wrong on what QE3 (the January 25th push of 0% to 2014) would do for US Growth by a lot

So, is Ben Bernanke a credible source? Are his academic cronies? Does he have any business perpetuating policy expectations that are built on his forecasted expectations? Or is he just doing more and more of what has not worked, hoping he gets something right?


I don’t know the answer to that last question. But it certainly rhymes with how a lot of bad managers, coaches, and players approach playing at the highest level too. Maybe this time is different, but for those guys it never ends well either.


My immediate-term support and resistance risk ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, US Treasury 10yr Yield, Russell2000 and the SP500 are now $1, $113.92-116.48, $79.74-80.97, $1.26-1.29, 1.68-1.74%, 827-846, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Rhyming 2008 - Chart of the Day


Rhyming 2008 - Virtual Portfolio

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.

FNP: On-Track

Takeaway: We're comfortable that things are still on track at $FNP to be a $20 stock.

We met recently with the top management team at FNP – which included our first introduction to new CFO George Carrera. Overall, we walked away with a high degree of confidence that this is a name that should continue to work despite doubling over the past year.


Here are our notes…


George Carrera (CFO) Introduction:

  • Impressive. Bringing more transparency and granularity to the forecasting and planning functions – something that was not the focus of prior CFO (who was all about getting much-needed deals done).
  • Comes across as much as a COO as he does a CFO, if not more. This actually makes sense at FNP, given that they have Bob Vill, who is SVP/Treasurer and could otherwise represent FNP as CFO both externally and internally (he was offered the job).
  • Providing key operational support to Leeann at Juicy. Bill McComb (CEO) and George are spending 80% of their time at Juicy Coture (not sure if this is good or bad).
  • Focused on SG&A allocation – initially at corporate where primary experience has been, but now shifting towards greater focus on brand level SG&A – particularly at Juicy where he is working to redeploy SG&A. This is not incremental investment, but reduction of some redundancies offsetting additional planning resources.
  • It’s nice to see the brand-level SG&A reallocation as long as 1) it does not come away from a capital base otherwise needed to grow sales and gain share, and 2) mitigating redundancies does not get in the way of FNP being able to easily shed one of its brands if the time and/or necessity presents itself.
  • During the 3-year time period Bill tried to sell Mexx, he met George during M&A process w Tommy Europe.
  • Was looking for someone that can play a bigger role in the corporation under the new strategy
  • What attracted GC to FNP:
    • Opportunity to make $
    • Int'l footprint - white space opportunity
    • SG&A - opportunity to leverage it given experience at Tommy where they had to revisit cost structure nearly 2x a year
    • Quality of team here much stronger than at Tommy, have invested in the right areas

Note: The SG&A element is the only potential negative point that came from our meeting. If executed properly, and if all three concepts thrive, it could be great, but if they implement too many shared services between the three distinct companies, it could take down the 'ease of disposal' factor should either Juicy or Lucky become un-savable. We’ll keep a close eye on this.

    • Corp SG&A at ~4% were considering a corporate ERP system, but have opted to spend on e-commerce instead = higher ROI
    • When asked about what he thinks will drive his stock price (keeping in mind that he has never been CFO of a publicly traded company) he noted – very quickly “Growth in profitability and beating expectations.” Not a perfect answer, but good enough for us to check the box.


  • New POS systems to enable mobile checkout and converging data sources and brands into one database to optimize e-commerce assets
  • Kate e-commerce accounts for over 20% of sales; Juicy and Lucky just under 10% suggests an aggregate e-commerce penetration of ~11% of total sales putting FNP in the top quartile of retailers. Goal is 30% for all brands.




  • Key hurdle remains store productivity of $650
  • Focus has been retail > wholesale > outlet > e-commerce > sourcing - currently at e-commerce as primary focus after securing and improving retail/whsl/outlet performance
  • Top/bottoms still very strong - accessories very strong on a smaller base as well as Vince Camuto FW license also doing very well
  • Men's has been strong, but key is reinvigoration of women's line
  • Next steps to growing business is int'l - have been getting increasing interest from brand partners to run business overseas - expect to ramp in 2013



  • Product is good, it's the merchandizing that's the issue
  • Addition of second level talent has been a key addition to the team
    • Tom Linko (CFO as of June) - had worked with George at Tommy before will oversee order management, merchandise planning and allocation, and real estate
    • Ann Bernstein (SVP Global Business and Strategy in April) leading financial planning, Juicy Int'l, licensing, retail, wholesale, and e-commerce
    • George has also stepped in as LeAnn's operational partner of sorts
    • There's a redeployment issue at Juicy no an incremental SG&A investment issue - the planning and allocating issues have become more visible
    • Dave DeMattei was starved for the data to better plan his business - George is taking that process to Juicy
    • The brand leaders have been very good at sharing best practices, but they are deeply brand loyal - therefore doesn't make sense to transfer talent from Kate or Lucky to help out at Juicy
    • Recouturing of Stores:
      • Not looking for drastic architectural changes - looking for new paint, rugs, some fixtures (like they did with Kate)
      • More of a touch up (only 2 rehauls where stores will need to be closed) than larger transformation along the magnitude of new store investment
      • Will impact 16 stores on top of 12 done already on 131 store base
      • Very light capital investment


Kate Spade:

  • Asia business - buys off U.S. product line
  • Growth in Japan driven primarily by comp, not as much by doors
  • Customer demo has broadened to women born in the 1980s - an incremental add'n to brand demand
  • Re distribution - think fragrance is a big opportunity - also watches at wholesale



  • Target is to have ~80% of product made for outlet (where Kate and Lucky are)
  • Juicy is a drag - need to design for outlet instead of shipping out of season product from specialty stores
  • Margin differential b/w full-price and outlet similar to peers



  • Kate e-commerce accounts for over 20% of sales; Juicy and Lucky just under 10% suggests an aggregate e-commerce penetration of ~11% of total sales putting FNP in the top quartile of retailers.
  • In the process of converging data sources and brand info into one database to leverage intell
  • Store presence/showroom is additive to drive traffic and interest in e-commerce



  • Incremental increase in F12 CapEx to $90mm from $75mm includes $5mm of transformative growth CapEx = high ROI investments (40%+)
    • 16 Juicy stores, add'l Lucky outlets, and NYC specialty Lucky store in Time Warner Center


Balance Sheet:

  • Turning inventory at an 'appropriate' rate (at benchmark or better)
  • Plan to improve inventory buys to further improve turns


Incentive Structure:

  • Based on profitability re 4-yr plan
  • Tweaking up the minimum thresholds internally


Is The Vegas Recovery Over?

Las Vegas Strip data for July seemed positive off the bat, signaling that Vegas might have gotten its act together after putting up continuously dismal numbers since April. However, examining the all important slot metric and revenue per available room (RevPAR) data, it appears that Strip has a long way to go before it's in full on recovery mode.


July’s data is a tad misleading due to the fact that it’s missing two weekend days. RevPAR is trending very low and needs to be at least +3% to offset inflation. Vegas is also seeing fewer slot players. Visitation growth needs to be higher by 1-2% over the long-term. Our chart below shows year-over-year visitation and RevPAR change and as you can see, both are beginning to trend even lower.


Is The Vegas Recovery Over?  - FF large

URBN: Feel The Love

Takeaway: It's a sell-side love-fest as it relates to commenting on $URBN's comp trends, but in reality, it is still an under-loved stock.

Conclusion: It's a sell-side love-fest as it relates to commenting on URBN's comp trends, but in reality, it is still an under-loved stock. Despite the move, we're still there.


Several brokers were out this morning echoing URBN's positive comp trajectory commentary in its 10Q filed last night, and how it supports the turnaround story that is taking place. We usually step back and re-evaluate when we see so many uniformly similar comments about a name that we have been positive on – especially when the stock is up 50% since May when we added to the Hedgeye Virtual Portfolio. But the reality is that when looked at in context, the Street is still not too bullish on URBN at all. In fact, there are 32 firms that ‘cover’ URBN, and as the first chart below indicates, we’re currently looking at the lowest ratio of Buy ratings, and highest ratio of Sell ratings in the recent (5-year) cycle. While some will consider the 9% of the float being short as too low for URBN (ie suggesting that investors are a step ahead of analysts), we'd look at others like Macy's where short interest is sub 2% -- which is an absolutely unsustainable level. That's makes investors' bearish bets on URBN look more significant.


URBN: Feel The Love - 9 11 2012 12 33 34 PM

 Source: Factset


Aside from looking at sentiment we need to take this announcement for what it is – a sequential improvement in a high-return concept that has a lot of upside.


Here’s what we said back in May around the time we got more heavily involved…  

“Let’s not bend any facts here. The quarter stunk. URBN took 8.6% sales growth and morphed it into a 10.1% EBIT decline. But relative to expectations, it was slightly better. One comped a comp (Urban), while the other (Anthro) comped down on the easiest compare of the year. There were definitely puts and takes. But the big take-away came from simply listening to this management team.


They sounded so extraordinarily focused on the conference call – such a stark contrast to the URBN of six months ago. Seriously…go back and listen to the past two calls. Night and day. That’s what you get when you bring in the founders to save the day.


The message is simple.

  1. Hire all the right talent.
  2. Empower each of them to come up with a concise plan, to which they will be held accountable.
  3. Give them the financial and human resources to achieve the plan.


Along the way, they’ve got shared services initiatives (DC just going up for 3Q) that should allow URBN to leverage the back-end across concepts while investing in areas like mobile and digital to more efficiently flow product and reach new customers.


They don’t really give comp forecasts – which is great bc forecasting comps is ridiculous. They simply focus on the process to put up the numbers, and hold themselves accountable to execute. Anyone reading this knows that I (McGough) rarely throw out public kudos to management teams, but the bottom line is that listening to these guys is like listening to a company with $10bn in revenue, not $2.5bn.


There’s still wood to chop here, no doubt. But we’re coming up with estimates about 20% above consensus. If we’re right, then URBN is trading at about 7.1x our next year EBITDA estimate. If you want to short that, knock yourself out.”


The stock is certainly much more expensive today, but we arguably underestimated the extent to which estimates needed to go up. When estimates are headed higher (as they still have to go) it’s a fool’s game to bet against a high-return growth retailer.


URBN: Feel The Love - 222

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