• run with the bulls

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    of hedgeye free




Friday's Jobs number looms as delinquency data shows that the pain continues


As it stands today, we have zero exposure to US equities in our asset allocation model.  In particular we have aggressively sold off our exposure to consumer discretionary in the vortex of the recent MEGA squeeze. 


After a good, solid start to June and with the S&P at 930, we have been harping on the theme that "less bad" is different from "good."  We are data driven and, as such, need to see the "good" in the dominant story to cement a bullish conviction. We are not seeing "good" yet.   


Today's, payroll report estimates that another 532,000 workers lost jobs in May.  More than consensus thinking!  This continues to cause trouble for the consumer lending markets, from mortgages to credit cards and everything in between.


About 12% of mortgage loans were delinquent or in the foreclosure process during 1Q09, according to data released by MBA last week, while Federal Reserve estimates put the number at almost 9% on a broader measure of residential real estate loans.   These levels represent the highest recorded, exceeding the levels reached in the early 1970's and follow broad trends in consumer credit, with rising delinquencies in categories like credit cards and car loans showing no clear signs of abating.


 The majority of the foreclosure problems remain concentrated in four states: California, Nevada, Arizona and Florida, where home prices spiked the highest and are now in freefall. According to MBA, these four states alone accounted for 56% of the increase in foreclosure starts.  Anecdotal reports from brokers in those markets report that sales trends appear to have bottomed but are not getting measurably better.


Clearly the housing picture is better than it was in January, but with seasonal inflections, the Obama taxpayer credit for first time home buyers and historically low interest rates any resilience here should be no surprise.


Our zero exposure to US equities is a big statement!  Friday's employment report should be less constructive than the last two - which were bullish catalysts for us as we looked for signals that the rate of job losses was compressing. Now that our 1H thesis has become consensus and the seeds of optimism have begun to nurture loftier expectations, a signal of anything less than a strong signal of leveling in payroll declines seems poised to strike fear into the hearts of hopeful bulls.


Howard Penney

Managing Director


Andrew Barber






Retail First Look 6/3/09: False Security


I commented yesterday about the evolution in the M&A cycle. In the land of retail, this comes hand in hand with licensing.  If my own brand stinks, I probably want to buy the rights to profit on the heels of another - at least that's been the industry standard mindset.  To say that we're seeing more activity in licenses would be a severe understatement. Check out Zach's overview below. We had PVH sign a deal to grow IZOD into the 'home' category, Brown Shoe align itself with Marvel, the new Miley Cyrus/Max Azria/Wal*Mart deal, Converse selling shoes ACDC and Metallica shoes (in addition to Floyd, The Who and others - yes, the aging hipster in me thinks this is cool), and the London Olympic Organizing Committee sending RFPs for sponsorship for the 2012 games. At the same time, there's a notable industry study showing how licensing royalties are coming down at the same time many traditional licensees are cutting capital from their business models. Mark my words...this is no accident.


Think about it like this... Let's say you are a mid-size company whose EBIT is derived evenly between your own content and content you license from other companies. For the past 7 years, the industry has had every bit of wind at its back (import quota changes, FX, input cost deflation, strong consumer) such that everyone made money - even the marginal players. Now we're in a multi-year period where the opposite is a reality, and many mid-tier brands will go away. So now your top line is under pressure, you've underinvested in your brands, flowed through too much FX and sourcing benefit to your bottom line instead of plowing back into your model. So now what? You're probably cutting costs reactively and irresponsibly to keep your head above water. Do you cut costs out of your own content? Or from what you were allocating toward another company's content that you licensed and ultimately will return to them? I'd challenge anyone to find me a company that would opt to damage its own content over another's.


My point here is that we know that the bankruptcy cycle will continue, and it will take the M&A cycle along for the ride. But don't ignore the licensing angle either. These are easily won and lost streams of business that can meaningfully change a company's cash flow.



Some Notable Call Outs

  • More mixed signs for May. Some retailers have noted a roll-over in May, but Dollar General did not. DG reported 1Q comps of +13.4% with 193bps of gross margin expansion, and 150bps of SG&A leverage. Sales were driven with by consumables along with strength in seasonal, home, and apparel. May trends were hinted to be at least as strong as 1Q. Promotional activity, primarily on consumables, remains "as intense as the CEO has ever seen". Consistent with the most of the industry, DG is also seeing real estate costs come down on both new and renewal properties. Dollar General's results reinforce 1) the importance of value to low-income consumers, 2) the continuation of "trading down" and 3) how retailers with deep-value focused consumable strategies continue to substantially outperform all other sub-sectors of retail.


  • Brief updates from CAB and HIBB from the Stephens conference:


  • CAB comps have been impacted primarily by weak traffic, which has been largely driven by two factors, politics and fear. Consumers have been buying guns and ammunition ahead of the common belief that onerous tax hikes will be levied on these items in the near-term. This has not only increased buying from repeat buyers, but has also driven demand from new buyers. The balance of recent demand is thought to come from those seeking protection in these uncertain times. Management indicated that the demand we saw through Q1 that lead to ammunition shortages appears to remain strong. [McGough's Note: If I hear one more person talk about trying to time 'the gun/ammo trade' with CAB and GMTN, I'm going to lose it...].


  • HIBB announced that it will begin implementing a new labor management this fall that will likely result in lower payroll expense and better merchandise management. This is yet another sign that the company is gearing up towards its next growth phase beyond 750 stores towards 1 stores and sustainable double digit margins. [McGough's Note: this is big...HIBB's major weakness in years past has been inability to control and leverage labor costs].


  • Cliff Notes from the TJX annual meeting Tuesday. The key takeaway is how the company plans to expand its reach, continue growth and yet cut expenses at the same time. Opening 15-20 more stores than initially expected (they noted this a few weeks ago). Reduce capex by 23% and cut $150mm in opex. Looking to grow internationally - specifically Germany. TJX inked deals with "hundreds" of new vendors in the first quarter alone.


  • PVH continues to expand the reach of its brands into the home furnishing space with the announcement of IZOD bed, bath and kitchen products. Last fall, the company entered the furniture realm with its own CK furniture line. While not expected to move the needle near-term, these initiatives could generate substantial revenue down the road in addition to enhancing brand image. It also plays into the housing improvement cycle that we called throughout Q1.



MORNING NEWS (full detail including sources at end of this note)
Zach's overview of items you're unlikely to find in the general press.

  • The commercial court in Paris placed Christian Lacroix into administration for a period of six months yesterday
  • Teens Outline Brand Preferences in New Research Report. Under Armour is a positive call out.
  • Abrams Research firm released a study today on the luxury industry, after speaking with more than 100 carefully selected industry experts
  • Fashion brands couldn't escape an erosion in their royalties last year
  • The TJX Cos. Inc. told shareholders at the company's annual meeting Tuesday that it plans to expand its reach and keep a lid on expenses
  • Golf Shoe Cos. Sued for Patent Infringement
  • Puma N.A. Secures U.S. Swimwear, Beachwear Licensee
  • The Finish Line Partners with Soles4Souls for B-T-S Promotion
  • Used SG Purchases Fell Below $1 Billion in CY08
  • Brown Shoe Co. strikes a licensing deal with Marvel Entertainment that will allow the Famous Footwear parent to add characters from Marvel's upcoming feature films
  • Converse is rolling out Fall collections of the iconic Chuck Taylor All Star in collaboration with rock and metal artists AC/DC and Metallica
  • Cranston Print Works, of Webster, MA, which printed millions of yards of cloth, is shifting all textile printing to China, Korea, Pakistan and Taiwan
  • Donald Craig Wood, the principal of the Temecula, CA business known as Golden State Golf, filed for Chap. 7 bankruptcy protection on May 29
  • Neiman Marcus Inc. has centralized its fashion office
  • Miley Cyrus and Max Azria are heading to Wal-Mart to launch a trend-right collection. [McGough Note: I'm the first to admit that Miley is huge (as will my 8-year old daughter) but when is the last time you heard a CEO stand up and say "we're going to launch a new 'trend-wrong' collection. C'mon...].
  • Gucci, Richemont Seek Sanctions Against Bank of China in Counterfeit Case
  • U.K. online retail sales will grow 13.3% this year, research firm predicts
  • The London Organizing Committee of the Olympic Games and Paralympics Games has started sourcing licensees for the design, manufacture and U.K. retail distribution of London 2012-branded product across categories
  • With AIG not extending its jersey sponsorship deal with Manchester United, Aon Corporation, a $10 billion company who specializes in risk management, insurance and consulting, is expected to take over
  • Hi-Tec footwear company is putting a premium on technology for its fall '09 line


RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough):


06/02/2009 2:42 PM


McGough remains negative on the fundamentals here (see his recent note). From a quantitative perspective this stock is overbought today. KM



HBI: Thomas Weisel Partners came out overweight on HBI

GIL: Thomas Weisel Partners came out underweight on GIL

This guy has got the right call going here.



VFC: Frank Pickard III, VP & Treasurer, disposed of 7,100shs ($423,870) representing ~50% of his total holdings.

GPS: Marka Hansen, President, Gap Brand, disposed of ~31kshs (~$57,500) representing ~30% of his total holdings.

COH: 5 different executive level employees bought modest amounts of stock (<$20k) via the company's employee stock purchase plan.



Retail First Look 6/3/09: False Security  - 6 3 2009 9 57 19 AM



  • The MVRX continues to outperform up +96bps vs. the S&P +20bps yesterday.
  • TLB +19.7% was the greatest outlier to the upside on nearly 3x avg. daily volume and the only double digit gainer vs. 9 on Friday.
  • ZQK +2.4% continuing a 6-day run ahead of earnings Thursday (AMC) on nearly 3x avg. daily volume.
  • ZUMZ +7.6% on 2x avg. daily volume - the most significant upward move since issuing weaker than expected guidance on 5/21.
  • JCG -4.5% returned the prior day gains after a monster run into earnings and 26% jump on Friday.
  • NKE -2.4% took its first breather after a 7-day Dollar trade inflated run.



 Retail First Look 6/3/09: False Security  - 6 3 2009 9 54 30 AM



The commercial court in Paris placed Christian Lacroix into administration for a period of six months yesterday. It remains unclear whether the couture house will show at the next Haute Couture fashion week in Paris which takes place July 6-9. Last week Christian Lacroix said it planned to file for bankruptcy protection after it was hit by falling sales. Christian Lacroix himself, who set up the label in 1987, is reported to have said he will give "200%" to keep the fashion house running. Reports suggest that the designer is owed around €1.2 million (£1m) by the company. Christian Lacroix is owned by Falic Group, which bought the label from LVMH in 2005.

Pasted from <http://www.drapersonline.com/news/womenswear/lacroix-in-administration/5003219.article>


Teens Outline Brand Preferences in New Research Report - It would come as no surprise that teenagers rate the Nike and Adidas brands highest in many categories of brand strength, given the brands' global appeal and marketing budgets, but consumers aged 12 to 17 years old were dramatically more likely to be aware of and purchase the Under Armour, Speedo and Puma brands than the U.S. population as a whole. That conclusion is based on the latest Brand Strength Report - Teen Edition produced by The SportsOneSource Group

Pasted from <http://www.sportsonesource.com/>


Abrams Research firm released a study today on the luxury industry, after speaking with more than 100 carefully selected industry experts. "There's definitely a cautious optimism among the experts in the luxury market right now," Abrams, who is also chief legal analyst for NBC and MSNBC, told WWD in an exclusive interview. "The luxury goods market is one that is preparing for change as a result of recession and the expansion of the online market." Below, additional results and data from the study are available exclusively on WWD.com. Abrams Research Luxury Brands Survey, 2009:

  • When asked how best a luxury brand could adapt to and survive the recession, 34.9 percent of respondents suggested cutting back on everything but essentials, and making "quality essentials the core of the brand." (Only 2.8 percent suggested cutting back on luxury materials.) Meanwhile, 33 percent suggested launching an offshoot, down-market brand instead. Just 9.4 percent suggested cutting back on advertising.
  • Destination markets: Our experts tapped China as the next big luxury market to break into by a decisive margin, 42.5 percent. The next-closest potential market was India (17 percent) followed by the Gulf States (14.2 percent).

Brands Most Likely to Make the Most of the Recession

   Topshop - 34.1%

   Chanel - 28%

   Louis Vuitton - 21.9%

   Forever 21 - 13.4%

   H&M - 13.4%

   Marc Jacobs - 13.4%

   Hermès - 7.3%

   J. Crew - 6.1%


Best Shopping Brands Online

   Net-a-porter.com - 33.7%

   Gilt Groupe - 15.7%

   Neimanmarcus.com - 8.9%

   Barneys.com - 6.7%

   Eluxury.com - 6.7%

   Bluefly.com - 5.6%

   Shopbop.com - 5.6%

   Saks.com - 5.6%

Pasted from <http://www.wwd.com/business-news/>


Fashion brands couldn't escape an erosion in their royalties last year, but their decline was smaller than most other classifications of intellectual property and the universe of North American brands. Fashion brands took in $775 million in royalties last year, down 4.3 percent from $810 million in 2007, according to the annual Licensing Industry Survey conducted by the Licensing International Merchandisers' Association, released on Tuesday. Overall, royalties declined 5.6 percent in North America to $5.66 billion from $5.99 billion in the prior year. The figures refer to the origin of the brands and not to the categories of merchandise for which they're licensed. For instance, character licenses, by far the largest category in the LIMA survey, logged royalties of $2.61 billion, down 3.9 percent, but much of the merchandise sold under those licenses was in apparel and accessories. Following characters in royalty revenue, but a distant second, were corporate trademarks and brands, down 8 percent to $975 million, followed by fashion and then sports, down 9.2 percent to $740 million. The only category to escape a decline in royalties last year was collegiate brands, which grew 3.5 percent in royalty revenue to $208 million. The largest decline, outside of the catchall "other" category, was art, where royalties sagged 12 percent to $154 million. "Given the economic climate, the revenue declines are not unexpected," said Charles Riotto, president of LIMA. "However, a strategic, thoughtfully implemented licensing program remains a very effective way for businesses to build their brands, drive incremental revenue and position themselves to thrive in a rebounding economy. "It's more important than ever for brand owners to identify brand extensions that will support and enhance their core businesses, while retaining flexibility to be there when consumers are ready to buy," he concluded. The results were culled from companies in the licensing business, examination of public financial documents and interviews with licensing industry executives.

Pasted from <http://www.wwd.com/business-news/>


Golf Shoe Cos. Sued for Patent Infringement - Adidas, Adi subsidiary TaylorMade Golf, Callaway and ECCO USA are the named defendants in a patent infringement suit filed last week in Philadelphia by plaintiffs Greenkeepers, Inc. of Philadelphia and Greenkeepers of Delaware. http://www.sginewswire.com/sginewswire/index.asp


Puma N.A. Secures U.S. Swimwear, Beachwear Licensee - Blue Water Design Group, the former Waterfront Design Group which was acquired by Apparel Ventures Inc. in 2004, has been named the Cat's official licensee for women's swimwear and beachwear in the U.S. market. Blue Water will be responsible for design, merchandising, sales and marketing of the collection that will be marketed to key department. http://www.sginewswire.com/sginewswire/index.asp


The Finish Line Partners with Soles4Souls for B-T-S Promotion - The athletic specialty retailer is teaming with the Nashville-based organization, which distributes footwear to needy people worldwide, on a used shoe collection program for the next three months. Starting yesterday and ending Sep. 7, FINL will encourage its customers to bring in a pair of new or 'gently worn' shoes at any of its 690 doors. http://www.sginewswire.com/sginewswire/index.asp


Used SG Purchases Fell Below $1 Billion in CY08 - U.S. consumers bought $969 million worth of used sporting goods last year, falling below the $1 billion threshold for the first time in three years. In CY07, sales of used sporting goods hit $1.08 billion. A year earlier, they totaled $1.01 billion, according to research conducted for the National Sporting Goods Association (NSGA). http://www.sginewswire.com/sginewswire/index.asp


Brown Shoe Co. strikes a licensing deal with Marvel Entertainment that will allow the Famous Footwear parent to add characters from Marvel's upcoming feature films to several footwear collections. The partnership will begin with an Iron Man 2 shoe for the toddler, youth and young adult market in Spring 2010 and will be followed by styles adorned by other Marvel superheroes such as Thor and Captain America

Pasted from <http://www.sginewswire.com/sginewswire/cgi-bin/sginewsdetail.asp?news_id=14636>


Converse is rolling out Fall collections of the iconic Chuck Taylor All Star in collaboration with rock and metal artists AC/DC and Metallica

Pasted from <http://www.sginewswire.com/sginewswire/cgi-bin/sginewsdetail.asp?news_id=14636>


Cranston Print Works, of Webster, MA, which printed millions of yards of cloth, is shifting all textile printing to China, Korea, Pakistan and Taiwan.

Pasted from <http://www.sginewswire.com/sginewswire/cgi-bin/sginewsdetail.asp?news_id=14636>


Donald Craig Wood, the principal of the Temecula, CA business known as Golden State Golf, filed for Chap. 7 bankruptcy protection on May 29. Petition lists $276,145 in total liabilities, including $247,997 owed to unsecured creditors. Top five trade unsecured creditors are: TaylorMade ($8,712), Ping ($7,920), Callaway ($7,077) and Mizuno USA ($6,803). First meeting of creditors is scheduled for June 30 in Riverside, CA.

Pasted from <http://www.sginewswire.com/sginewswire/cgi-bin/sginewsdetail.asp?news_id=14626>


Neiman Marcus Inc. has centralized its fashion office, giving three seasoned fashion executives responsibilities for the Neiman Marcus, Neiman Marcus Direct and Bergdorf Goodman divisions. Under the reorganization, Kareen Mallet becomes women's ready-to-wear senior market editor. Mallet, who had the same title at Neiman's, will be responsible for covering contemporary, bridge, dress collections, evening, lingerie and coats. Roopal Patel, women's fashion accessory senior market editor, will cover handbags, shoes, fashion accessories, fashion jewelry and designer jewelry. She previously was senior fashion director at Bergdorf's covering various women's areas. Tommy Fazio, men's fashion director and senior market editor, will be responsible for covering men's designer, sportswear, tailored clothing, contemporary, furnishings, men's accessories and shoes. He previously was men's fashion director at Bergdorf's. Officials said the three fashion executives were given broader roles to leverage their skills and to take over the responsibilities for two individuals who retired from Neiman's in the past two months: Sandra Wilson, who covered accessories, and Colby McWilliams, who was the men's fashion director. They were not replaced. The company also said no layoffs resulted from the centralization. The new fashion office will report to Ken Downing, who serves as senior vice president and fashion director at Neiman Marcus stores and simultaneously covers the women's couture and designer markets for Neiman's. He now also oversees the administrative matters concerning the staff at the central fashion office, located at 1450 Broadway in Manhattan. With the reorganization, said Neiman's president and chief executive officer Karen Katz, "we are now able to fully utilize the talents and strengths of Roopal, Tommy and Kareen across all brands and channels while providing each of them with new areas of growth and responsibility." Jim Gold, president and CEO of Bergdorf Goodman, explained why NMG decided to centralize the fashion office. "We had an opportunity to leverage two extremely talented individuals for the corporation, Roopal and Tommy," he said. "These two individuals know Bergdorf's so well and have unique fashion skills so the Neiman Marcus Inc. felt that we could [more fully] utilize their talents. As they cover the markets, they will look through the lens of both brands."

Pasted from <http://www.wwd.com/business-news/>


Miley Cyrus and Max Azria are heading to Wal-Mart. Miley Cyrus, the teen sensation whose alter ego, Hannah Montana, stars in her own TV show and concerts, is teaming up with Max Azria, chairman, designer and chief executive officer of BCBG Max Azria Group, to create a junior line for Wal-Mart called Miley Cyrus and Max Azria, sources said. The trend-right collection will bow in all Wal-Mart stores and on walmart.com in early August, the sources said, adding the line will include tops, pants, graphic T-shirts and shoes, priced under $20. A Wal-Mart Stores Inc. spokeswoman could not be reached for comment, while a spokesman for Max Azria declined comment. Cyrus has been a fan of Azria's designs for some time. She wore a short Hervé Léger by Max Azria dress in April to the U.K. premiere of "Hannah Montana: The Movie," and for the 2009 Grammy Awards, Cyrus donned a custom Hervé Léger by Max Azria black gown.  Azria is said to have developed a rapport with Cyrus in the course of dressing her for events and eventually became acquainted with her parents - her father, country star Billy Ray Cyrus, who appears on the "Hannah Montana" series, and mother, Tish. The Miley Cyrus line is the second major teen country star Wal-Mart has linked with in the last few months. The retailer already carries a line of cami dresses by country sensation Taylor Swift under the label L.E.I. by Taylor Swift, which is exclusive to Wal-Mart. Other junior collections offered at the store include "America's Next Top Model" T-shirts and sweatpants; No Boundaries athletic shorts and tank tops, and Op smocked jersey dresses and tube dresses. In the past, Wal-Mart has offered Mary-Kate and Ashley Olsen's tween fashion line and Stuff by Hilary Duff. The Wal-Mart deal marks Max Azria's second foray into mass market territory and gives him agreements with the world's two largest retailers - Wal-Mart and Carrefour. In 2006, Azria signed a deal to design a women's ready-to-wear collection for the French retailer, which operates hypermarkets in France, Greece, Spain, Belgium, Italy and Portugal. The collection Tex by Max Azria launched for the fall-winter 2007 season. At the time, industry sources familiar with the arrangement said the deal, which ends Dec. 31, 2011, has a minimum guaranteed volume of 1 billion Euros, or about $1.3 billion, over the course of the contract, plus escalations per season. The BCBG Max Azria Group is a diversified organization. Its portfolio of 22 brands includes BCBGeneration, Max and Cleo and Manoukian, among others, with price points from less than $20 for Miley Cyrus and Max Azria at Wal-Mart, to $3,000 for a Hervé Léger dress at Bergdorf Goodman.

Pasted from <http://www.wwd.com/retail-news/>


Gucci, Richemont Seek Sanctions Against Bank of China in Counterfeit Case - Gucci America Inc., the luxury company that is owned by Paris-based PPR SA, asked a U.S. judge to hold Bank of China Ltd. in contempt for failing to turn over documents and to order it to pay $4 million.

Pasted from <http://www.bloomberg.com/news/industries/consumer.html>


U.K. online retail sales will grow 13.3% this year, research firm predicts - Verdict Research estimates online retail sales in the United Kingdom this year will exceed $34 billion. By 2013, the research firm says, online retail sales will surpass $51 billion and represent 10% of all retail sales in the U.K.

Pasted from <http://www.internetretailer.com/>


The London Organizing Committee of the Olympic Games and Paralympics Games has started sourcing licensees for the design, manufacture and U.K. retail distribution of London 2012-branded product across categories. The IP covered includes the core London 2012 branding, the official mascots, sporting pictograms, Team GB and Paralympics GB. The initial categories, which will be awarded after a tender process, are home textiles, stationery and print, ceramics and glassware, souvenirs and jewelry. "The London 2012 licensing program is progressing well and there are significant opportunities for companies to get involved with the Games," says Simon Lilley, senior manager of licensing and retail for LOCOG. "We're looking for innovative responses from companies which can offer expertise and creativity in these sectors." The first stage of the process is to register on the Compete For Web site, which is the online service for matching potential suppliers with Games-related business opportunities. Closing dates for expressions of interest across the different categories are home textiles-June 12; stationery and print-June 19; souvenirs-July 3; ceramics and glassware-July 10 and jewelry-July 24. Partners signed for London 2012 are Tier One Partners - adidas, BP, British Airways, BT, EDF Energy, Lloyds TSB and Nortel. Tier Two Supporters - Adecco, Cadbury and Deloitte. Tier Three Suppliers and Providers - Airwave, Atkins, Boston Consulting Group, Crystal CG, Freshfields Bruckhaus Deringer LLP, McCann Worldgroup, Populous and Trident. The Worldwide Olympic partners signed up for 2012 are Coca-Cola, Acer, Atos Origin, GE, McDonald's, Omega, Panasonic, Samsung and Visa.

Pasted from <http://www.licensemag.com/licensemag/Sports/London-Olympics-2012-Launches-Licensing-Tenders/ArticleStandard/Article/detail/601029?contextCategoryId=33594>


With AIG not extending its jersey sponsorship deal with Manchester United, Aon Corporation, a $10 billion company who specializes in risk management, insurance and consulting, is expected to take over.

Pasted from <http://www.cnbc.com/id/15837629>


Hi-Tec footwear company is putting a premium on technology for its fall '09 line, which uses Vibram rubber, Thinsulate insulation and the company's Ion Mask waterproofing system to keep customers warm, dry and stable in winter weather. The $50 to $110 collection will begin delivering this month (continuing through September) to outdoor specialty shops, family footwear chains and sporting goods accounts.

Pasted from <http://www.wwd.com/footwear-news/>


Retail First Look 6/3/09: False Security  - 6 3 2009 9 53 39 AM




Piggy Banker

"Not by the hair on our chinny-chin-chin. You can't fool us with that old sheepskin."
-Three Little Pigs          
As we trekked to higher-highs on low volume in the US stock market yesterday, I for one was having a hard time discerning the sheep from the wolves. That said, the piggies were right where they have always been - hanging out in plain daylight, chowing down at America's trough.
After a +39.6% trough-to-peak move in the SP500 from the March 9th lows, all you have to do at this stage of the game is follow the feedbag. Who gets paid with the free monies in play and the US Dollar looking more and more like a straw house? Follow the monies...
In America, there are three very important constituencies that have been getting paid in Q2:
1.      The Politicians

2.      The Debtors

3.      The Bankers

Bankers? Getting paid? Uh yeah... big time. The combination of A) a free money short end of the Treasury curve (3-month Treasuries hit 0.13% this morning!) and B) a socialized Heli-Ben flight pattern of limitless credit creation that has imposed the steepest yield curve that we have seen in modern history. The spread between 10 and 2-year Treasury yields hit a new high yesterday at +270 basis points wide!
In simpleton terms, all that means is that Timmy Geithner and De Boys in De Banking Club get to borrow from a socialized US banking system at effectively less than 1%, and lend it whenever they so choose to the American commoner at, well, whatever rate they so choose. Borrowing short and lending long is what bankers build those big houses with folks - this compensation structure isn't new.
What is new is that we have a highly politicized US Financial System that pays Piggy Banker first. The reason why it's hard to discern the wolves from the pigs is because they're all in the same house together! Yeah, you might knock off another third of the hedge fund community who shorted this compromised and conflicted system the whole way up, but who cares? Timmy? C'mon - these guys want hedgies to fail - it amplifies their populist political capital.
The Politicians get paid as the US stock market and home prices stabilize. This is THE REFLATION trade that everyone and their pet piggy bank finally understands. Don't forget that The Debtors also get paid when you collapse the world's reserve currency. Roughly 53% of the world's debt is denominated in US Dollars. Reckless borrowers of levered long days past, worry no more - that big bad wolf ain't in the business of blowing your underwater houses down!
So if the Politicians, Debtors, and Bankers are all getting paid in some form of actual or political capital, who loses? Ah... yes, Mr Darwin, there are losers here aren't there? There two very important ones actually:
1.      The Creditors

2.      The Americans

Of course some Americans, like money managers who can only make money in an up tape don't lose - the last 3-months have been fantastic, if you were long that is. That said, some of them... like say, Bill Ackman, will go as far to cry in public if they can't muster a way to lever up their clients' monies one last time to make some hay. If you can't make money during one of the most expedited short squeezes in US stock market history, and you're a "fundamentally oriented" lever it up to the wazoo type guy, your asset management house of cards is probably coming down.
Most Americans who have had the sobriety of a savings account get screwed here. Jaime Dimon will prance around CNBC's stage while his government funded bank pays effectively zero on this US citizen's savings. But he's going to have a great quarter - and he's "really smart."
Never mind the yield curve chow down at the trough of American savings. Now Piggy Bankers and the corporates they pander to are issuing more shares than even the math guys can count. Last check we had Timmy's survivors of his made-up test with made-up rules plugging the Street with almost $70B in common stock issuance. Jaime was good for $5B of that himself!
The US stock market may have made a higher-high yesterday, but the US Financials (XLF) didn't. The XLF (Financials ETF) closed down -1.6% on the day, after the Piggy Bankers, well... they pigged out.
The Creditor of this Piggy Banker story is China. President Obama isn't highlighting this obviously (he's more into the storytelling needed to support The Politicians as of late), but when Timmy told the audience in Beijing this week that "Chinese financial assets are very safe," the audience laughed!
They laughed at the Piggy Banker and sent him back into the stratosphere of American Credibility Lost. The US Dollar and US Treasuries have been marked-to-market folks. This children's story, unfortunately, doesn't end with the American dream I aspire to tell my son Jack that I have had the blessing to live.
I've sold all of my exposure to US Equities as of yesterday's close. No, that doesn't mean I am shorting this Piggy Banker system en masses, yet... I remain long China, Gold and Inflation Protection (TIP). My downside target for the SP500 is 910, and my upside target remains 955. Trade the range. If you have to be invested in the US, that's all you can do for now.
Best of luck out there today,


CAF - Morgan Stanley China Fund- A closed-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.

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.

XLU - SPDR Utilities - As long term bond yields breakout to the upside, Utility investments are the relative yield loser. XLU was the second worst performing sector behind financials yesterday.
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.

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OEH announced after the close that it sold the 109 room Lapa Palace in Lisbon for $41.8 million.  OEH deemed it important to identify the huge 22x EBITDA multiple of the transaction.  The property generated under $2 million in EBITDA.  Who cares what the multiple is?  On a per key basis, this palace sold for $383k per key, hardly a trophy value.  We had the property valued higher.


Apparently George Maloof (The Palms) has a solution to a weak condo market-self financing.  Speculation is that if The Palms is successful MGM may follow suit.  Well that sounds like a great idea - I wonder why no one has done that?  Oh wait, someone has thought of that - it's called Timeshare.  The difference is, in this version, the financing spread would likely be hugely negative and there would be a horrible duration mismatch with no securitization market. 


Maybe we're missing something, but last we checked the average Vegas operator's cost of borrowing is still around 10%, which is at least a few hundred basis north of the 30 year mortgage rate (even for Vegas condos).  Assuming $1000/month of maintenance charges on a $1MM purchase, any rate less than 8.3% would result in a negative carry on a 70% loan to value.  Then there's the whole issue of duration mismatch since the duration on the borrowings of most companies is less than 10 years while most mortgages have over a 20-year duration.  


Aside from perhaps an incremental 10% of equity from the buyers, we're not sure why financing condo sales makes any sense versus just putting them into the hotel rental pool.  Assuming $200 ADR, 75% occupancy and a 30% EBITDA margin, it seems like it would make a lot more sense to just rent out the rooms despite the probable cannibalization of existing room demand.


The other risk of providing 70%-80% financing is that operators will be left holding the bag on any pricing declines in excess of 20-30%, which is a reality given that many of these deals were struck at the peak of the market.


Looks like a pretty stiff wind to spit into.

Singapore: One more bullish data point for the Revisionists...


Positive data point from a very small, very strong economy ...


May PMI data released by the Singapore Institute of Purchasing & Materials Management showed a positive reading for the first time since August of last year, registering at 51.2 as orders flowing in from "The Client" showed no signs of abating.  Demand from China for consumer electronics were particularly pronounced, driving the electronic sub index to its second consecutive positive monthly reading of 52.9.


As an entrepot economy with the highest per capita GDP in Asia, Singapore has always served as a barometer of regional trade.  These latest figures are yet more support for our long China thesis and a reminder that Korea and Taiwan do not have a monopoly on Chinese demand for high margin consumer goods.


Andrew Barber



Singapore: One more bullish data point for the Revisionists...  - sing

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