Growing The Economy


Hedgeye CEO Keith McCullough appeared live on CNBC’s The Kudlow Report this evening to weigh in on the second presidential debate. The topic du jour was growing the economy and how each candidate proposes doing so.


According to Keith, we need to get back to a stronger dollar and stronger America. We need confidence and have to instill it in small business owners and entrepreneurs. Growth starts with capitalists and a pro growth tax policy that helps businesses. If Romney can deliver that, he'll knock Obama out cold.


Watch the clip above for Keith’s appearance on The Kudlow Report.



Today we shorted MGM Resorts (MGM) into the close at $10.73 a share at 3:48 PM EDT in our Real Time Alerts. 


TRADE OF THE DAY: MGM  - tardemgm


The short follows Gaming, Leisure and Lodging Sector Head Todd Jordan’s guidance from a bearish note he put out on October 15 suggesting that MGM could be a decent short. The stock is right at the TRADE line of resistance of $10.71 a share and fundamentals are in line with the call. MGM is a stock that has a great deal of exposure to the Las Vegas gaming market and right now, Vegas is in a slump. Per Jordan’s note:


The Las Vegas Strip is back in a slump.  Slot volume, which we believe is the most important barometer of the Strip, has declined for five consecutive months and the bleeding will likely continue through Q1 2013.  Slot revenue has outpaced slot volume growth for years as the player payout has declined.  We don’t think a strategy of “price increases” through worse player odds is sustainable.

CRI: Product Differentiation

Carter's (CRI) is a company full of challenges that lie ahead and our Retail Team has focused its attention on product differentiation, or lack thereof in the case of Carter's, which impacts the company's ability to command pricing power with wholesale accounts. Going forward, Cater's will find it difficult to justify its EBIT margins with its current setup.


Consider that you can get Carter's products in its own stores, Walmart, Amazon and other places. The same goes for produce from Nike (NKE) and Ralph Lauren (RL) but the difference is in the product stratification by availability and price. For instance, Ralph Lauren and Nike have their own direct channels via Nike and RL stores. Here they sell higher-end products that are priced as such. They can also sell entry-to-mid level product to retailers like department stores, Kohl's, online websites, etc. 



CRI: Product Differentiation  - CRIProdDiff normal



Carter's on the other hand just sells the same product at the same price across all channels. 90% of the product hitting the floor on on the first day comes with an average 40% discount. In other words, it has no pricing power. It has 24% market share in its core business, and 12% share in kids - about midway between a NKE and RL.

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Takeaway: We remain bearish on $DRI, $BLMN, and $TXRH

The Bureau of Labor Statistics released CPI data for the month of September this morning.  The spread between CPI for Food at Home versus Food Away from Home continues to grow.  Inflation in the restaurant check is far-outstripping inflation in the grocery aisle.


The advantage that restaurants enjoyed over grocers in 2011, in terms of lower price increases year-over-year, has reversed.  Restaurants’ pricing power is much-diminished.  As CPI for Food at Home decelerated to 0.8% in September, CPI for Food Away from Home continues to grow at 2.8%. 


CPI DATA REMAINS BEARISH FOR RESTAURANTS - food at home vs food away from home



Casual Dining


As we wrote in our recent post, “RELATIVE VALUE MATTERS FOR CASUAL DINING”, our research indicates that the Restaurant Value Spread, or difference between CPI FAH and CPI FAFH, is highlighting downside risk for casual dining same-restaurant sales expectations.





Howard Penney

Managing Director


Rory Green



CRI: Product Differentiation Considerations

Takeaway: The root of CRI’s challenges lie in the lack of its differentiation of product by channel.

Here’s one of the 20+ exhibits in our CRI Black Book that we think is worth calling out. It highlights what we think is the root of many of the company’s challenges.

Specifically, CRI has little product differentiation relative to other brands. You can get CRI product in Carter’s own stores, at Wal-Mart, Amazon, Kohl’s, JC Penney, or Macy’s and it all pretty much looks the same. You can get away with that as a small brand – like how big CRI was a decade ago. But with over $3bn in (retail equivalent) sales, you’ve got to be careful – especially with so many new competitors coming into the space today (GILT, Giggle, Children’s Place at Sam’s, etc…).

Take a look at some of the premium branded apparel/footwear manufacturers in retail like NKE, Ralph Lauren, Under Armour, Coach, and you’ll see a very clear product stratification and segmentation strategy. What is sold through company direct channels (owned-retail/e-commerce) is higher-end, often exclusive, and priced accordingly. Product sold through specialty retail channels is often exclusive in some regard (colorways, limited quantity, etc.) along with other premium brand product. Then you have the entry level product at mass/department stores and 3rd party e-commerce, which covers some combination of mass and specialty, but not company direct. This is not how CRI sells through to the market. It’s the same product, same price. Or even worse, similar product, different price.

Is it fair to compare CRI to these brands? As long as people are arguing that CRI will get to 14% EBIT margins, the answer is yes. NKE has 40% market share in footwear, 15% in apparel, and has pricing power. Yet it has only has a 12-13% margin. RL has about 7-8% share in the US. It too has pricing power, and it has a similar retail/wholesale mix as CRI. RL’s margins are about 14%. UA has a high growth trajectory with RL-like market share in an oligopoly with pricing power. Yet it has only 10% EBIT margins.

CRI has a very promotional model, with 90% of the product hitting the floor on day 1 with an average 40% discount. In other words, it has no pricing power. It has 24% market share in its core business, and 12% share in kids – about midway between a NKE and RL. But should CRI have the same margins as these other players? We have a hard time arguing that they do.

For a more detailed analysis, please see our CRI Black Book “CRI: The Margin Rebound Disconnect



CRI: Product Differentiation Considerations - CRIProdDiff



Trade Idea: Shorting EWQ (France)

Takeaway: Hollande’s socialist agenda will push up the country’s debt level and reduce competitiveness. We expect a rising risk premium.

Positions in Europe: Short France (EWQ); Long German Bonds (BUNL)

Keith added EWQ to our Real-Time Positions at $21.58 on 10/15. EWQ’s immediate term TRADE support is $20.34 and intermediate term TREND resistance is $21.84, which is currently broken to the upside.


With regard to the trade Keith said: “Re-shorting a country that has failed in their Keynesian policies to deliver the elixir of GDP growth. France has stagflation instead.”


Trade Idea: Shorting EWQ (France) - bb. ewq


We’ve long had a skeptical eye on Socialist President François Hollande, beginning with his very loud “tax the rich” campaign slogan and lack of focus on reducing France's fiscal fat. 


Late last month Hollande delivered on much of what he promised; the 2013 budget notables included:

  • €10B of spending cuts and €20B of tax increases
  • Tax of 75% on incomes over 1MM EUR
  • Goal to bring the deficit down to 3% of GDP next year from a projected 4.5% this year (vs Spain 4.5%; UK 6.6%; USA 6.3%)
  • +0.8% GDP growth forecast for 2013

We frankly think that both its GDP and deficit reduction targets are overly optimistic.  And with public debt pushing 91% (as a % of GDP), France is above the level of 90% that economists Reinhart and Rogoff have indicated as destructive to growth. 


In recent weeks France's business federation has vetted its frustrations with Hollande’s polices.   The group is rightly concerned about a competitiveness drag, including from Article 6 of the new tax law, which raises the top rate of capital gains tax from 34.5% to 62.2%. For reference these levels compare with 21% in Spain, 26.4% in Germany and 28% in Britain.


Given its debt drag and the square stagflationary position the economy is in (Q2 GDP Final 0.0% Q/Q and 0.3% Y/Y and CPI registered 2.2% SEPT Y/Y vs 2.4% AUG) we expect not only growth to underperform expectations, but an upward inflection in its relatively stable and low yields (see charts below) alongside a heightened risk profile with a likely downgrade of the sovereign by another main credit agencies this year. [Currently, the Standard & Poor’s has cut France to AA+, while Moody’s and Fitch remain at AAA].


Trade Idea: Shorting EWQ (France) - bb. france yields 1


Trade Idea: Shorting EWQ (France) - bb . france yield 2


The most current data also confirms a sagging economy: French PMI Manufacturing fell to 42.7 SEPT vs 46.0 AUG and Services dampened to 45.0 SEPT vs 49.2 AUG, both below the 50 line indicating contraction. Confidence figures also remain depressed:  Business Confidence (down to flat since March 2012); Consumer Confidence (down since June); and Consumer Spending has been negative (year-over-year) for the last two readings.


While Spain is taking the sovereign spotlight light in the Eurozone right now – as rumors swirl today that Madrid is considering requesting a credit line, rather than a full-scale bailout from the ESM, and may qualify for the ECB's OMT – we caution on the rising risk profile of France. We expect growth and competitiveness to take large hits under Hollande’s fist and think combined with the likely downgrade of the sovereign that credit spreads should inflect off their current lows to represent France fiscal imbalances.


Matthew Hedrick

Senior Analyst

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