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The Las Vegas Sun reported that some CityCenter condo buyers are trying to renegotiate their purchase contracts to better reflect market conditions.  Market conditions could suggest prices almost 50% below what the buyers had already agreed to.  We know of some in the gaming investment community (buyside and sellside) that are probably in this camp.


A little macro analysis might have persuaded the buyers to wait and not buy at the peak.  A little more macro analysis back in the spring of 2008 would've persuaded gaming analysts to downgrade gaming as housing prices had already been falling. 


We've been critical of investors and especially sell side analysts that "don't do macro".  It has shown in their work over the last year and it looks like it may be adversely affecting their personal investments as well. 


Its 7am PST and the CKE Air force in route to Palm Springs on the Friday before Memorial Day weekend.

I would bet money the CEO is not paying the $10,000 is cost to fly from Santa Barbra to Palm Springs!


CKR – HOW NICE   - ckrflight


HIBB: Real Estate Call Out

"...We feel with a lot of small landlords, and we and they are experiencing a lot of uncertainty. Many new store deals are falling out because of lack of money on the landlord side and small landlords are having a great difficulty getting bank financing.


When the retail environment improves we will grow our store base at a faster rate. "

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Success Is No Accident

"Success is no accident. It is hard work, perseverance, learning, studying, sacrifice and most of all, love of what you are doing or learning to do."
It's great to be able to speak your mind!  When you speak your mind writing research, it's like working in a fish bowl - there is no escape and you are accountable for everything you say. 
I have been writing research my entire professional career and I have learned to take the good with the bad.  I like to take calculated risks; I'm not always right and being wrong when working in a fish bowl can be very painful.  However, the reward for knowing that you have helped someone else be successful is amazing.
It was a calculated risk to go to work for a start up, independent research firm in the midst of a financial crisis not seen in generations.  A year later we continue to take significant market share from broken business models.  The employees at Research Edge have one thing in common - we are students of the markets and love getting stocks right!  
Growing up I was a soccer player; a sport which most people think is boring.  The sport of soccer is actually a thinking man's game.  The best soccer players in the world are nimble and know where the ball is going to be before it gets there.  The same is true for the market and individual stocks; know where they are going before they get there and you win!  Play the game that is in front of you and you will be one step ahead of the competition. 
Keith McCullough had never worked in a research fishbowl until he started Research Edge and we all are painfully aware that he did not play soccer! But over the past six months he has definitely been nimble and has known where the ball was going! 
For 2009, the entire set up was prefaced on his "Breaking the Buck" macro call and for a generational short squeeze in most global equity markets.  I don't think there is another MACRO strategist on the street that made that call!  If there is, please let me know because I would like to tell him he should have been a soccer player too!

It is painful to watch those in charge of the country "react" to the buck breaking!  After the market starts to melt down on concerns about our AAA credit rating and the mighty dollar crashing, Treasury Secretary Timothy Geithner goes on Bloomberg TV and says "It's very important that this Congress and this president put in place policies that will bring those deficits down to a sustainable level over the medium term."  His target is to reduce the gap to 3% of GDP from around 13% this year.  Who is he kidding?
I know this is Obama speak, but let's be realistic.  In the age of TRILLION dollar bail outs, the budget deficit is going up, not down.  One thing you can be sure of is "the medium term" will not be during his tenure as treasury secretary and potentially not during Obama's term as president.
As we have said all year, the most dominant macro factor at work has been the US Dollar down and stocks up.  For three straight days, it's been dollar down, stocks down; the dollar crashing is now a bad thing! 
The Safety trade and reflation are the only two themes that still have legs in this market.  The early cycle Consumer Discretionary and Technology name are breaking down, as we now only have 5 of the 9 sectors positive on both the durations of TREND and TRADE. 
While our Macro team has been on fire this year, the research team continues to score big too.  Today we are waking up to KeyBanc upgrading Autodesk (ADSK) from Underweight to Hold after the company reported better than expected numbers.  ADSK has been in the virtual portfolio since 3/23 and looking to provide 50% return in just two months!  Well done Rebecca! It's great to be on a real team again. Success is no accident.
Function in Disaster, finish in style
Howard Penney        
Managing Director



EWA - iShares Australia-EWA has a nice dividend yieldof 7.54% on the trailing 12-months. With interest rates at 3.00% (further room to stimulate) and a $26.5BN stimulus package in place, plus a commodity based economy with proximity to China's H1 reacceleration, there are a lot of ways to win being long Australia.


XLE - SPDR Energy- We bought Energy on 5/13 with the dollar up. We think it works higher if the Buck breaks down.  Bullish TRADE and TREND remain.

CAF - Morgan Stanley China Fund- A close end fund providing exposure to the Shanghai A share market, we use CAF tactically to ride the wave of returning confidence among domestic Chinese investors fed by the stimulus package.  To date the Chinese have shown leadership and a proactive response to the global recession, and now their number one priority is to offset contracting external demand with domestic growth.

EWD - iShares Sweden-We bought Sweden on 5/11 with the etf down on the day and as a hedge against our Swiss short position. From a fundamental setup, we're bullish on Sweden. The country issued a large stimulus package to combat its economic downturn and the central bank has effectively used interest rate cuts to manage its economy. Sweden's sovereign debt holds a strong AAA rating despite Swedish banks being primary lenders to the Baltic states. We expect Sweden to benefit from export demand as global economies heat up.

XLV - SPDR Healthcare-Healthcare looks positive from a TRADE and TREND duration. We've been on the sidelines for the last few months, but bought XLV on a down day on 5/11 to get long the safety trade. 
TIP- iShares TIPS -The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield on TTM basis of 5.89%.  We believe that future inflation expectations are currently mispriced and that TIPS are a compelling way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.

GLD - SPDR GOLD -We bought more gold on 5/5. The inflation protection is what we're long here looking ahead 6-9 months. In the intermediate term, we like the safety trade too.  



EWJ - iShares Japan -We re-shorted the Japanese equity market via EWJ on 5/20. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands. 
UUP - U.S. Dollar Index -We believe that the US Dollar is the leading indicator for the US stock market. In the immediate term, what is bad for the US Dollar should be good for the stock market. Longer term, the burgeoning U.S. government debt balance will be negative for the greenback. The Euro is up versus the USD at $1.3962, a four-month low for the Dollar. The USD is down versus the Yen at 94.1150 and down versus the Pound at $1.5848 as of 6am today.
EWW - iShares Mexico- We're short Mexico due in part to the repercussions of the media's manic Swine flu fear.  The country's dependence on export revenues is decidedly bearish due to volatility of crude prices and when considering that the country's main oil producer, PEMEX, has substantial debt to pay down and its production capacity has declined since 2004. Additionally, the potential geo-political risks associated with the burgeoning power of regional drug lords signals that the country's economy is under serious duress.
IFN -The India Fund-We have had a consistently negative bias on Indian equities since we launched the firm early last year. Despite recent election results likely proving to be a positive catalyst, long-term we believe the growth story of "Chindia" is dead. We contest that the Indian population, grappling with rampant poverty, a class divide, and poor health and education services, will not be able to sustain internal consumption levels sufficient to meet targeted growth level. Other negative trends we've followed include: the reversal of foreign investment, the decrease in equity issuance, and a massive national deficit.

LQD  - iShares Corporate Bonds-Corporate bonds have had a huge move off their 2008 lows and we expect with the eventual rising of interest rates in the back half of 2009 that bonds will give some of that move back. Moody's estimates US corporate bond default rates to climb to 15.1% in 2009, up from a previous 2009 estimate of 10.4%.  


EWL - iShares Switzerland - We believe the country offers a good opportunity to get in on the short side of Western Europe, and in particular European financials.  Switzerland has nearly run out of room to cut its interest rate and due to the country's reliance on the financial sector is in a favorable trading range. Increasingly Swiss banks are being forced by governments to reveal their customers, thereby reducing the incentive of Switzerland as a tax-free haven.

MW: Activism Brewing?

It seems to have slipped under many radars that Men's Wearhouse just added a change in control provision for its top five officers.  The language was strong enough for our affiliate Michelle Leder (footnoted.org) to flag for us, and her track record in spotting these outliers is notable. In addition, the short interest is high at 15% of the float, and the stock looks bullish from a TREND perspective on Keith's models. While we can make a pretty convincing case that the 10%+ margins of yesteryear are a pipedream for MW as unit growth, offshoring and department store destocking themes have largely played out, this is the sort of sleepy name at a trough point in the cycle where activism would not come as a surprise.



What prompted Mens Wearhouse to suddenly add change in control agreements with its five named executive officers on May 15? The company disclosed the new agreements in both the proxy and a separate 8K filed late Wednesday.


We can think of only two likely scenarios here: another company may be looking to acquire Mens Wearhouse or a large investor - think Pershing Square's Bill Ackman and his run on Target here -- might be contemplating a challenge to the company's board. Option A seems a bit more likely, not least of all because if there is an Ackman-like person out there, they've yet to surface.


What makes the filing really stand out is that Mens Wearhouse isn't a new company and change in control agreements tend to be pretty standard things. George Zimmer, for example, started the company over 35 years ago and none of the other top executives are new hires. Given that, why would the company suddenly enter into these agreements on May 15?


After a quick skim comparing the 2008 proxy to the one filed on Wednesday and throwing the 8K also filed on Wednesday into the mix, it seems pretty clear that something is going on here that's worth paying attention to.




  • Revenue is highly tied to low-fashion "business attire", of which tailored clothing accounts for 55% of core revenues.  This is a company whose core sales have been weakened almost step for step with the overall economy. 


  • With very little fashion risk in the assortment, revenues here to do not spike in good times.  However, they do see disproportional downside when unemployment is at historical highs.  A suit is the last thing the average male "wants" to buy.


  • Historically the business was successful as they took share from traditional tailored suit distribution channels (i.e department stores exiting the low turning, service intensive business).


  • As the top-line grow, margins expanded as well.  The company benefited greatly over the past few years from greater imports and direct sourcing shifting to Asia.  Remember that the tailored business was still being done domestically, but with also a fairly large Canadian and Mexican manufacturing base.


  • Additionally, the acquisition of the free-standing tuxedo business in April 2007 has provided a positive benefit to margins.  Gross margins for the tux rental business are 82% vs. core gross margins of 55-57%.  As the tux business continues to grow (expected to be up MSD 1H09) at the faster rate than the base (which is now barely growing with store growth cut to 10 stores, from 40-50 per year), there is a positive mix benefit here.


  • Offsetting the tuxedo business is a recent decision to aggressively promote the suit business through BOGO (Buy One Get One) offers.  This is a new strategy that began in 4Q08 and is expected to continue throughout '09 at the very least.  This is a departure from the company's historical EDLP strategy, and is one that will produce gross margin pressure at the very least through 2009.  This is one of the top factors as to why it may be unrealistic to see margins expand again in the near term.  Of course they can cancel this marketing program, but we know from the shoe business how long it takes to wean the consumer off of BOGO's.


  • Also as it relates to BOGO, if you don't need a suit because you're not employed, then you certainly don't need two!


  • In looking at the CEO Zimmer's health, he did have a surgical procedure in 2005 related to an infected abdominal aortic graft.  Since then however, there have been no public announcements related to his health.


  • Bottom line, the boom growth years appear to be over from a store opening/market share perspective.  As the economy recovers, men will resume suit purchases.  However, the duration of the recovery remains to be seen and it certainly won't occur over night. 

What To Do With Copper? Hint: Watch Chinese Stocks They Have the Conch...


We have been fairly aggressive on our long copper call in 2009. In fact, on February 25th we sent the following note to a client when he asked us what we though about copper:


"This is like holding a massively inflating ball of air, under water - if it gets through 1.54, that's going to ring the bell of every short seller from here to Dubai...


Very simply,


  • 1. China buying on the LME now, direct - for their Strategic Reserve
  • 2. All of mining is cutting capex for Wall Street's sake - supply coming online in the out years coming down = commodity inflation in the long term
  • 3. Economic should and will continue to see a sequential acceleration from Q4 2008


We see this as a buy for a Trade at $1.49/lb and a breakout for a Trend (3 months plus) at $1.54/lb"


The rest as they say is history, but copper is now at a much higher price and some recent price action has us more cautions.  After all, even an early recovery indicator that The Client (China) needs, such as copper, has a price.


We have an expression (to be fair, we have many expressions) at Research Edge and we say, "She / He has the Conch", which effectively means that whomever has the conch has the voice or the floor to continue to own the debate.  When it comes to copper, China has the Conch.  In fact, in the year-to-date the correlation between the Chinese stock market and copper is 0.88.


In the chart below we've outlined the performance of the Shanghai SE Composite versus front month COMEX Copper YTD, which shows this relationship graphically as well.  Below that chart we highlight copper imports into China, which provide the underpinning of the fundamental case for copper from a demand perspective, which is that year-over-year imports into China are up in February by 45%, March by 55%, and April by 62%.


As is always the case with China, people debate whether the data is real or whether the commodity is being stockpiled versus used in actual economic activity.   To some extent, it doesn't matter in the short term as demand is demand.  Longer term it will certainly be more relevant.  The Chinese are many things, economically irrational, I don't think so.  They are buying copper either because they need it, or because it is cheap.


The recent move in copper (breaking down through our TRADE line of support of 2.08/lbs) may be actually indicating that demand from China may be peaking.  Regardless, and in the short term at least, watch the Chinese when it comes to copper because until the facts change, they have the conch.


Daryl G. Jones

Managing Director


What To Do With Copper? Hint: Watch Chinese Stocks They Have the Conch...  - conch

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