Shame on You, Ben Bernanke

“Insanity: doing the same thing over and over again, and expecting different results.” -Albert Einstein


Albert Einstein’s famous quote on insanity is rather apropos today in light of the Bernanke Fed’s shameful decision to shirk its duties and avoid tapering yesterday.


As I wrote in my morning newsletter, I’m going to keep this missive tight. Because if I really ranted about what I really think about what Ben Bernanke just did failed to do, I might lose some of my firm’s clients and have the NSA parked outside of my house.


Moving on.


Shame on You, Ben Bernanke - deba


Here are some quick observations regarding the implications of the Fed’s unfathomable dereliction of duty.

  • The US Dollar has been bloodied. It has been beaten down to 3 month lows by our un-elected, unaccountable, Fed Chief. Thanks Ben.
  • Bernanke just confused every Institutional portfolio manager I talk to. Implied volatility is going up on this decision. You can take that to the bank.
  • Unsurprisingly, Asia ripped higher on Down Dollar. India up +3.7%, Indonesia up +4.7%, Thailand up +3.8%. Nikkei up+1.8%. Other Emerging Markets that love this US Dollar Debauchery? Take a look at Turkey. It shot up +7.6%.
  • Witness the new highs in Europe. It’s across-the-board for the majors; FTSE  up +1.4%, DAX up 1.2%.
  • Vladimir Putin? He loves Bernanke’s Dollar Debauchery. That’s a no-brainer. It lines his pockets. It means up Oil. Russia up almost 4%. Just great. Got #CommodityInflation?
  • The good news is that if you’re a gold bug, Bernanke may have saved your precious metal from totally crashing to earth (at the expense of the purchasing power of the American people). The bad news is our Fed overlords have decided to keep the oppressive oil tax intact on average Americans at the pump (Down Dollar, Up Oil). No, not good.
  • Growth, as an investment style factor, has been smoking slow-growth in 2013 year-to-date. That may very well change now. More to be revealed.

Bottom line: It was a great day for US stock market bulls. But a very sad day for America.

E-Cigarette Industry Insights From Victory CEO

On Tuesday we hosted an expert call on electronic cigarettes featuring Brent Willis, CEO of Victory Electronic Cigarettes. Below we summarized Brent’s key industry insights from the call and encourage you to listen to the call replay (~ 50 minutes) as he provides great insight into the rapidly evolving electronic cigarette story that his company is a part of. Here are the links to the replay podcast and presentation


We remain very bullish on the evolving electronic cigarette category. We believe e-cigs offer a compelling alternative to traditional cigarettes and offer the consumer a much different experience than a nicotine patch or gum. There has been a rapid pace of innovation, which, along with increased marketing and distribution, is bringing significant awareness to the category.


Industry estimates suggest that U.S. e-cigs sales were $150 Million in 2011, $500 Million last year, may reach between $1-2 Billion this year, and are poised to double in the coming years. We believe Big Tobacco’s involvement in the category – beginning with Lorillard and the launch of its brand Blu in April of last year to Reynolds American and Altria introducing their own e-cig versions over the last two months – should lend credibility to the category and accelerate growth. We expect e-cigs to be margin-enhancing to the combined cigarette category and 2014 to be a breakout year.


Globally we believe there’s a huge runway of opportunity for large and small e-cig manufacturers, as competition across the category is fragmented and brand development is in its infancy. While we believe that pending regulation from the FDA may come down on online sales and flavored varieties, we expect that e-cig consumption will continue to grow as consumers seek healthier alternatives to traditional cigarettes and given the significant price point advantage of e-cigs to traditional cigarettes. The data is already showing encouraging signs of strong repeat purchase behavior.


We are excited about the developing investment opportunities as this category gains visibility.



Summary of Industry Notes from our call with Victory CEO Brent Willis:

The Opportunity for E-Cigs

  • Unequivocally a healthier alternative to tobacco cigarettes
  • Huge opportunity to eclipse traditional tobacco: 90% of smokers have yet to try e-cigs
  • Highly attractive for retailers based on margin
  • Expects imminent development of next generation products that are more cigarette-like in form and function
  • Believes that because the category is so new, no one really has a brand. Currently, purchase behavior is primarily driven by what’s available
  • Data suggests that consumers score brands based on flavor profiles
  • On affordability, e-cigs are typically 30-40% more affordable than traditional cigarettes
  • Highly fragmented competition creates opportunity
  • > 30% of smokers report “trying to quit” each year

Traditional Tobacco vs. E-cigs

  • Traditional cigarettes category: over 1.3 Billion smokers globally, worth $720 Billion
    • 60 Million smokers in the U.S., $91 Billion category
    • In the U.S., 1 in 4 adults smokes
    • Asia (Japan and Korea in particular) has some of the highest incidence of smoking in the world, 8 of 10 smoke
    • > 6 Million people die each year from tobacco related diseases (a recent study suggested that if all smokers switched to e-cigs the number would go down to 600)
    • 60% of teens have tried cigarettes before they graduate high school in the U.S. and 20% of teens worldwide smoke
  • E-cig category: untapped in most markets globally = huge runway
    • U.S. sales now exceed $1 Billion, doubling every year
    • Volume sources = 99% of existing smokers that are “trying to quit”
    • 90% of consumers have never tried the category. The current trial rate of ~10% is consistently expanding, from around 2.6% “ever tried” at the end of 2010
    • Recent studies show that e-cigs are contributing to cessation of smoking, with up to 20% of smokers quitting completely and >  50% reducing cigarette consumption
    • Reductions in smoking related deaths should continue to propel the e-cig category

On Regulation

  • The reality is that the influence that regulation will have on the category is still unknown, worldwide
  • The e-cig industry has an industry association (TVECA) that is highly active and represents the category well
  • The FDA is potentially considering to regulate/propose restrictions on:  online commerce; flavor; age; communication; and safety/health certifications
    • While Brent has no knowledge on where the FDA will come down on restriction for the category, he has not heard that one of its considerations is an excise tax on e-cigs or a ban on areas where they may be smoked
    • Brent believes any restrictions will impact everyone in the category in the same way, but that the category is here to stay because of the huge consumer proposition of a healthier alternative to traditional cigarettes

On What’s Driving Consumer Behavior

  • Product mimics the smoking behavior, it’s the same experience (hand-to-mouth) without the “cancer causing ingredients in tobacco” (on average traditional tobacco has 4,000 chemicals vs e-cigs with 4 ingredients)
  • Over time as e-cig products develop, and offerings are even more like traditional cigarettes in terms of form, function, performance, and delivery, that’s when the category will really start to take off
  • Negative health effects of tobacco are clear to the public: cancer and heart disease; dramatic tax increases; health care premium increases; public bans; social stigma; and employer mandated cessation
  • E-cigs are the first truly new CPG category in more than a decade. It’s the first real consumer alternative
  • Compared to traditional cigarettes, e-cigs offer the same pleasurable experience, both physical and psychological; are non-carcinogenic; cost less; and reduce the social burden

Industry Outlook

  • Expects that technical performance changes and enhancement of e-cigs will propel the growth in the category even faster than current growth estimates
  • Opportunity is global and only now in an early stage, untapped in most markets internationally; there’s national distribution in the U.S., but huge opportunities for fragmented competition to take market share 


DISCLOSURE: Victory (ECIG) is a newly-public company with limited trading history and liquidity. Hedgeye has no investment opinion on Victory and no current plans to publish research on the company.   Certain Hedgeye executives may at some point become involved in a transaction with Victory or related entities.   This presentation is for information purposes only.



Matthew Hedrick

Senior Analyst

Jobless Claims: Right Direction

Takeaway: Jobless claims are still moving in the right direction.

Prior to revision, US initial jobless claims rose 17,000 to 309,000 from 292,000 week-over-week (WoW), as the prior week's number was revised up by 2,000 to 294,000.


The headline (unrevised) number shows claims were higher by 15,000 WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -7,000 WoW to 314,500.


The 4-week rolling average of Non Seasonally Adjusted claims (NSA), which we consider a more accurate representation of the underlying labor market trend, was -16.3% lower year-over-year, which is a sequential improvement versus the previous week's year-over-year change of -14.3%.


Bottom line is jobless claims are still moving in the right direction.


Jobless Claims: Right Direction - stein2


Jobless Claims: Right Direction - stein3

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 80.47%
  • SHORT SIGNALS 78.68%


Takeaway: The historical relationship between Fed purchases and initial jobless claims is strong. We consider the implications below.

Will This Time be Different?

In light of yesterday's announcement by the Federal Reserve that they will not begin tapering QE asset purchases, we thought it would be helpful to evaluate the historical relationship of QE and initial jobless claims. The chart below looks at the Fed's holdings of Treasury and Agency securities on the x-axis and compares those against corresponding levels of initial jobless claims (SA, rolling) on a zero lag basis. The time period is 2009-Present and the data points are weekly. We're using a second order polynomial (i.e. parabolic) regression here to reflect the fact that the level of jobless claims begins to reach frictional resistance below 300k. The equation of the line is shown in the chart for anyone who wants to run their own assessment. Assuming the Fed remains unchanged in its purchases for a further 6 months, which is what we would argue the market likely now assumes, the relationship suggests that we could expect to see claims running in the 275k range by March/April of next year. We're assuming $85bn/mo for 6 months would bring total Fed holdings to just under $4 Trillion.


Assuming their is a causal relationship here and assuming that it persists going forward, this would be very good news for lenders from a credit standpoint. One of our central tenets on COF has been that the labor market is getting better at a faster rate than people realize. This would certainly be consistent with that viewpoint. 


While we're personally disappointed in the Fed's decision, the game is what it is, and this has been the historical relationship between claims and Fed securities holdings, i.e. QE. Rather than fight the logic of the decision, we'll look to profit from understanding its implications.




The Data

Prior to revision, initial jobless claims rose 17k to 309k from 292k WoW, as the prior week's number was revised up by 2k to 294k.


The headline (unrevised) number shows claims were higher by 15k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims fell -7k WoW to 314.5k.


The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -16.3% lower YoY, which is a sequential improvement versus the previous week's YoY change of -14.3%.






























Yield Spreads

The 2-10 spread fell -10 basis points WoW to 236 bps. 3Q13TD, the 2-10 spread is averaging 234 bps, which is higher by 63 bps relative to 2Q13.







Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT



Hedgeye Risk Management CEO Keith McCullough discusses the Bernanke Fed's surprise decision not to taper and the enormous macro implications for the markets and economy in the months ahead. According to McCullough, "It was a great day for U.S. stock market bulls, but a depressing day for the country."


What’s New in Retail (9/19)

Takeaway: Athletic data update. RL management changes, and why we don't think DKS' targets are realistic.

What’s New in Retail (9/19)

As part of our morning routine, we scour the tape and trade rags for stories that we think might be relevant to our investment process. 





Athletic footwear sales continue to teeter on the zero growth mark in the US, though Athletic Apparel once again saves the day with growth in the low double digits. From a brand perspective, it’s the Nike and UnderArmour show. The only other brand that’s showing up to play is Skechers.  


What’s New in Retail (9/19) - Footwear ApparelChart1

What’s New in Retail (9/19) - Footwear2

What’s New in Retail (9/19) - Apparel3




NKE - Annual General Meeting, Thursday 9/19/13 1:00pm



UK retail sales in unexpected fall


"Data from the Office for National Statistics showed that the volume of retail sales dropped by 0.9% in August – mainly as the result of weaker demand for food.

Food sales dropped 2.7% in August, and there was little evidence of the recent pickup in housing activity helping sales of household goods, which fell by 1.6%. Over the three months to August – considered a better guide to the trend than one month's figures – retail sales were up by 1.7%. Annual growth – comparing the latest quarter with the same three months in 2012 – stood at 2.3%, the ONS said."


Our Take: This is in contrast to strong results recently posted by Sports Direct and Foot Locker in the UK. Either the athletic sector is holding up extremely well, or the Food retail space is under severe pressure.



DKS – Outlines Growth Strategy – We Don’t Believe It


During its Analyst Day, DKS outlined its growth strategy through the end of Fiscal 2017. Here are some of the highlights:

  • Revenues to reach $10 billion assuming a 11% CAGR from FY12 revenues of $5.8 billion
  • 10.5% Operating Margin, a 150 bps increase from FY12's 9.0%, through expansion of Gross Margin and SG&A leverage
  • E-Commerce revenues expect to grow to $1.1 billion, up from about $325mm today.
  • 800 Dick's Sporting good stores from 518 at the end of FY12
  • Growing Field and Stream stores from its 1 current location to 55 doors generating $750 million in revenue
  • $1.8 billion in CapEx



Our Take: There are companies that grow because they should, and others because they could. Dick’s in our opinion, is the latter. Reaching its lofty store growth goals while tripling e-commerce sales over three years and hitting new peak 10.5% margin levels seems incredibly aggressively to us – particularly given increased competition from the brands it sells as well as the Amazon’s of the world in hardgoods. We still scratch our heads as to why its such a consistent love-fest with this company.  We think DKS is a value trap.


RL - Ralph Lauren Announces That Roger Farrah Is Stepping Back


  • "Ralph Lauren Corporation... today announced plans to introduce changes to its leadership team and to create an Office of the Chairman, led by Ralph Lauren, Chairman and Chief Executive Officer (CEO) of the Company, and including Roger Farah, Jackwyn Nemerov and Christopher Peterson. Roger Farah, currently President and Chief Operating Officer (COO), will become Executive Vice Chairman. Jackwyn Nemerov, currently Executive Vice President (EVP), will become President and COO. Christopher Peterson, currently Senior Vice President (SVP) and Chief Financial Officer (CFO), will become Executive Vice President and Chief Administrative Officer (CAO) in addition to his role as CFO. The Office of the Chairman is being created to enhance the Company’s ability to support the growth of the business in an increasingly complex global environment and capitalize on new business opportunities. Mr. Farah, Ms. Nemerov and Mr. Peterson will report directly to Mr. Lauren. The changes will be effective as of November 1, 2013, allowing for a smooth transition period."
  • "In his new role, which reduces his time commitment to the business, Mr. Farah will be responsible for engaging in strategic projects and business development, as well as advising the Chairman and mentoring and counseling the management team."
  • "Jackwyn Nemerov, in her new capacity as President and COO, will be responsible for global merchandising, manufacturing and supply chain operations as well as the Company’s retail, wholesale and licensing businesses worldwide."
  • "Christopher Peterson, in his new capacity as EVP and CAO, will oversee legal, corporate facilities, global real estate, and corporate services and will also continue in his role as CFO to lead the global finance and information technology organizations, including financial planning and analysis, accounting, tax, treasury and investor relations."


Our Take: In effect, Roger will be spending 50% of his time on the business,  and the rest with his family. Nemerov and Peterson will pick up the slack on his day job. We have a particularly favorable opinion of Peterson, so we welcome him getting more involved. The negative part of this is that Roger is clearly one of the most highly regarded executives in all of retail. We like him being involved as much as possible at RL. On the flip side, there was a lot of speculation that Roger was going to leave the company outright – and now we know that this won’t happen.


ADS - Reebok Turns to ‘Race From Hell’ to Revive Former Glory


  • "This year for the first time, Reebok’s name will be on Spartan’s championship, the culmination of a race series that will attract some 500,000 athletes in 2013. The sporting-goods company, a unit of Adidas AG (ADS), signed a multi-year partnership with Spartan in January. Last month, Reebok signed a similar deal with Les Mills, a New Zealand company that sells branded fitness routine classes. And since 2010, it has sponsored CrossFit, a rival program."
  • "Reebok will start selling products developed for Spartan next year, prominently featuring the race circuit’s brand in addition to Reebok’s. Details remain under wraps."
  • "Reebok will produce and distribute products bearing both the Reebok and Les Mills brands and offer 100,000 instructors a 25 percent discount on clothes and shoes.


 Our Take: Reebok needs all the help it can get. Its market share in the US is 1/4 today of where it was when it merged with Adidas.


AMZN , SPLS, RSH - Staples, RadioShack Yank Amazon Lockers From Stores


  • "Staples Inc. (SPLS) and RadioShack Corp. (RSH) have removed Inc. (AMZN)lockers from their stores about a year after starting the program as competition stiffens with the online retailer. The chains began testing a system last year in which Amazon shoppers could have a Web order delivered to a store and then pick it up for no extra cost."
  • "Staples ended the test with Amazon after it 'didn’t meet the criteria we set up together,' Demos Parneros, president of North American stores and online for Staples, said in an e-mail."
  • "RadioShack stopped the program because it didn’t fit with its strategy, Merianne Roth, spokeswoman for the Fort Worth, Texas-based retailer, said today in an e-mail."


 BBG - Billabong Links With Centerbridge and Oaktree


  • "Surfwear company Billabong said Thursday that it has entered binding agreements with the hedge funds Centerbridge Partners and Oaktree Capital Management for a longterm refinancing package and ditched its previously announced refinancing deal with Altamont Consortium."
  • "The new Centerbridge/Oaktree deal includes a six year senior secured loan of $360 million; a 135 million Australian dollar ($127 million at current exchange) equity placement to the Centerbridge/Oaktree Consortium and, following the placement, a 50 million Australian dollar ($47 million) non-underwritten, renounceable rights issue available only to shareholders other than the Centerbridge/Oaktree Consortium. According to the statement, after the financial operations, Centerbridge/Oaktree will own between 33.9 and 40.8 percent of Billabong’s fully-diluted share capital."
  • "Centerbridge and Oaktree have tapped Neil Fiske, a former head of adventure-wear company Eddie Bauer Holdings Inc., to become Billabong's new chief executive and revive a suite of brands that also includes Tigerlily and Von Zipper. Mr. Fiske displaces the Altamont consortium's choice, former Oakley Inc. boss Scott Olivet."


SKS, HBC - Saks Incorporated Announces Plans for Seven New Saks Fifth Avenue OFF 5TH Stores in 2014


  • "Saks announced its plans to open seven new Saks Fifth Avenue OFF 5TH stores in 2014: The Outlets at Bloomfield in Pearl, MS; Potomac Mills in Woodbridge, VA; Palm Beach Outlets in West Palm Beach, FL; Outlet Shoppes at Louisville/Lexington, KY; Twin Cities of Eagan in Minneapolis, MN; The Mayfair Collection in Mayfair, WI; and Easton Gateway in Columbus, OH."
  • "The stores will range from 25,000 to 28,000 square feet and will be modeled in Saks Fifth Avenue OFF 5TH's luxury-in-a-loft store design."


LVMH - Fendi Celebrates New Milan Palazzo


"The luxury company will unveil its new flagship here on Thursday, the day of its show, and stage an exhibition titled 'Making Dreams: Fendi and the Cinema' to mark its enduring relationship with Cinecittà and Hollywood."

"Relocated from Via Sant’Andrea onto the prestigious Via Montenapoleone, the boutique is housed in the 16th-century Casa Carcassola-Grandi, with a neoclassical-style facade. Covering two floors and about 5,400 square feet... The opening comes on the heels of the new Avenue Montaigne store in Paris in July; both stores were designed by Tokyo-based French architect Gwenael Nicolas."


JWN - Nordstrom's New Americana Home


  • "Nordstrom held a gala Tuesday night to unveil what is increasingly a rarity in its portfolio: a new full-line store in the U.S.  Officially opening Friday, the 135,000-square-foot store at Caruso Affiliated’s shopping center The Americana at Brand in Glendale, Calf., is the first and only full-line Nordstrom completed this year as the retailer has focused expansion elsewhere. The store was relocated from the neighboring Glendale Galleria, where it had been since 1983."
  • "Another full-line U.S. store won’t open until September a year from now at The Woodlands Mall in The Woodlands, Tex., followed by an October opening at St. Johns Town Center in Jacksonville, Fla., before three full-line stores bow in 2015 at Ridgedale Center in Minnetonka, Minn., Mayfair Mall in Wauwatosa, Wis., and Del Amo Fashion Center in Torrance, Calif., a relocation destination. "
  • "When it comes to opening full-line Nordstrom stores in 2014 and 2015, a lot of the attention will shift north of the border prior to turning on Manhattan. Nordstrom has revealed that it will premiere full-line retail in Canada in September 2014 at Calgary’s Chinook Centre and subsequently in 2015 add four full-line stores in Calgary."
  • In Manhattan, Nordstrom will build a seven-floor, 280,000-square-foot full-line store…'It doesn’t open until 2018 and it’s a big, complicated project, but we are excited about that location and now the ball is in our court for the next couple of years to execute something that hopefully the people in Manhattan are excited about.'"


Patagonia - Patagonia Adds Worn Wear Sections to Four Stores


  • "Patagonia Inc. has expanded its sale of used Patagonia clothing from a trial in its Porland, OR store to full blown Worn Wear sections within its stores in Portland, Seattle; Palo Alto and Chicago (Lincoln Park). Customers can now purchase used Patagonia items from any of the four locations and continue to receive credit for bringing in their clothing for resale. Items accepted for trade-in include Patagonia shells, fleece, down and synthetic insulation, and ski and alpine pants. Clothing must be clean and in good condition, and customers can earn trade-in credit valued at 50 percent of the price of the item which will then be sold through the store's Common Threads Worn Wear section. Credit can be redeemed for purchases in store or online at"



  • FIVE's 7 million secondary share offering was priced at approximately $47 through Credit Suisse.


DLTR - Dollar Tree Adopts $2 Billion Share Repurchase Program


  • "Dollar Tree Inc. (DLTR) said its board of directors has authorized the repurchase of up to $2 billion in shares, including a $1 billion variable maturity accelerated share repurchase."


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