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A New Era Begins at Hedgeye

By Keith McCullough


This past Tuesday was one of the most humbling days of my professional life. It was our first full day working together as a team in our new state-of-the-art Stamford, CT studio office space. We had all hands on deck.


I say "studio" because that is exactly what we are building.


The next evolution of independent research coming out of our firm will include more simplifying communication tools like visualization and video-streaming. As Albert Einstein said about ideas, “If you can’t explain it simply, you don’t understand it well enough.” We'll have more on that as we move forward.


As far as the "humbling" part is concerned, externally at least, that’s not the first word that tends to come to mind beside my name. I don’t care about that as much as how my teammates and I feel when we are grinding it out together. Alongside my two beautiful children, I’ve never been so proud to see my family and firm move forward so selflessly. Thank you, to all of you, who have been a part of it.


A picture of our brand new office bright and early just before game time.

A New Era Begins at Hedgeye - hedgeye


Keith McCullough is the Founder and CEO of Hedgeye Risk Management. For more information on how you can subscribe to Hedgeye research click here.

What’s New Today in Retail (10/3)

Takeaway: RH Black Book. Athletic Apparel crushing it. JCP VFC GPS ADDDY HBC BURL SPD





RH Black Book - Monday 10/14

We’ll have a deep dive on the RH thesis as to how we get to $8.00 in EPS vs $1.50 today. In addition, we’ll have the results of our home furnishings consumer survey, which is an exhaustive product that will outline consumer sentiment towards RH, but also WSM, BBBY, PIR and other home retailers.




Athletic Apparel (Sportscan)

Takeaway: Industry trends remain robust, with sales up 7%. The catch is that units were down last week, with all the top line gains coming from ASP. This is extremely similar to what we’re seeing with footwear.  As for the brands, it continues to be the Nike and Under Armour show – as both are growing 3-4x the industry (ironically, Nike is winning – off a much larger base).

What’s New Today in Retail (10/3) - chart1 10 3

What’s New Today in Retail (10/3) - chart2 10 3

What’s New Today in Retail (10/3) - chart3 10 3

What’s New Today in Retail (10/3) - chart4 10 3


NRF Forecasts Marginal Sales Gains This Holiday Season



  • "NRF expects sales in the months of November and December to marginally increase 3.9 percent to $602.1 billion, over 2012’s actual 3.5 percent holiday season sales growth. The forecast is higher than the 10-year average holiday sales growth of 3.3 percent."
  • "Shop.org today released its 2013 online holiday sales forecast, expecting sales in November and December to grow between 13-15 percent over last holiday season to as much as $97 billion."
  • "The U.S. Department of Commerce announced that final Q4 2012 (October – December) e-commerce sales increased 15.5 percent."
  • "According to NRF, retailers are expected to hire between 720,000 and 780,000 seasonal workers this holiday season, in line with the actual 720,500 they hired in 2012, which was a 13 percent year-over-year increase from 2011."

Takeaway: In average economic climates, the NRF’s forecast is accurate within 100bp. But when there are dramatic fluctuations in consumer sentiment (ie ’08 and ’09) they’re off between 50%-100%.  In other words, we don’t trust these forecasts as far as we can throw ‘em.




JCP - Fitch Downgrades J.C. Penney Over Cash Burn



  • "Fitch Ratings on Wednesday downgraded its credit rating on J.C. Penney Co...pointing to the greater-than-expected cash burn this year at the struggling retailer."
  • "The ratings firm lowered its rating for J.C. Penney to triple-C from B-minus, saying it now projects the company to burn through $2.8 billion to $3 billion in cash this year, up by $1 billion from its May projection."
  • "Additionally, Fitch expects the retailer to require even more additional external funding next year, despite liquidity injections this year."
  • "After this year, Fitch said, J.C. Penney will need to generate a minimum of $750 million to $875 million in earnings before interest, taxes, depreciation and amortization to fund ongoing spending of $400 million to $500 million and cash interest expenses of $360 million to $375 million. That would mean a return to sales of $13.4 billion to $13.6 billion, or about 14% to 16% above current levels projected for 2013, the ratings firm said."

 Takeaway: One of the more backwards-looking calls we’ve seen of late.


GNC - GNC Holdings, Inc. acquires Discount Supplements (UK)



  • "[GNC]...today announced it has acquired A1 Sports Limited (d/b/a Discount Supplements), the leading multi-brand sports nutrition e-commerce retailer in the United Kingdom. The acquisition was funded with cash on hand. Terms of the deal were not disclosed."
  • "Following the acquisition, GNC.com, LuckyVitamin.com and discount-supplements.co.uk will continue to operate as separate businesses, each with its own product offerings and target customers."
  • "Discount Supplements - founded in 2004 – is expected to grow to approximately £20 million in revenue in 2013, and generate positive EBITDA margin.  GNC expects the acquisition to be earnings neutral in 2013, as the EBITDA contribution is offset by deal costs and amortization of intangibles."


PVH, GIII - PVH to Sell G.H. Bass Assets to G-III for $50 Million



  • "…[PVH] said it will sell nearly all of shoe brand G.H. Bass & Co. assets to clothing maker peer [GIII] for about $50 million in cash, unloading a brand it has owned since 1987."
  • "The move to sell G.H. Bass, which has had a soft retail performance in recent quarters, comes as PVH said it wants to focus on so-called lifestyle apparel businesses, which includes Calvin Klein and Tommy Hilfiger. The sale price is less than the amount PVH paid when it acquired G.H. Bass in 1987--the company spent $79 million to buy the brand from a division of Unilever…"
  • "PVH, meanwhile, expects the deal to also be a drag on adjusted earnings, and also expects to book a pretax loss of about $20 million in connection to the asset sale. PVH plans to use proceeds received from the deal to make additional debt prepayments."

 Takeaway: Good move by PVH. Investors don’t want it to own a) a shoe brand, or b) Bass. It has enough growth ahead of it with Calvin and Tommy – brands that the consumer actually care about.



Neiman Marcus - Even Neiman Marcus to offer free shipping



  • "Neiman Marcus Group is looking to revitalize its ecommerce before the holiday season’s fervor begins by offering permanent free shipping and returns year-round for all domestic purchases made through neimanmarcus.com and bergdorfgoodman.com as well as at retail locations."

Takeaway: A disturbing trend that ultimately most retailers will likely bow to.


GPS - Simon Kneen Leaving Banana Republic



  • "Simon Kneen, executive vice president of design and creative director of Banana Republic, is leaving the company, effective Dec. 31. Kneen’s departure was announced on Tuesday by Gap Inc. on the Banana Republic portion of the corporate Web site."
  • "Kneen, who has been in his current role since January 2008, will remain with the Banana Republic design team through the end of the year to help manage the transition. Julie Rosen, a 19-year veteran of Gap Inc., will continue in her role as evp of Banana Republic North America, leading merchandising and inventory management."

 Takeaway: Not good, but not a complete disaster. Let’s face it, Banana wasn’t exactly knocking the cover off the ball.


VFC - Lucy Installation Lights Up Boston



  • "The VF Corp.-owned brand is relatively unknown in the increasingly crowded activewear segment compared with competitors like Lululemon and Nike, but a new president and marketing initiative aim to supercharge consumer awareness efforts."
  • "Laurie Etheridge, former senior vice president of women’s merchandising and design at Levi’s, is now at the helm at Lucy, which today will launch the Light Forest, a light installation along the DCR’s Charles River Esplanade in Boston that runs for 10 days."


What’s New Today in Retail (10/3) - chart5 10 3


ADS - Reebok Signs 76ers Draft Pick 



  • "Reebok has signed Nerlens Noel, a rookie on the Philadelphia 76ers and the number six draft pick in the recent NBA contract, to an endorsement deal."
  • "Noel joins the Orlando Magic's Jameer Nelson, the Sacramento Kings' Isaiah Thomas, and the Brooklyn Nets' Jason Terry as a Reebok basketball endorser. The signing comes as Reebok's top player, Washington Wizards point guard John Wall, in January 2013 signed a new long-term endorsement deal with Adidas, which also owns Reebok."


HBC - Lord & Taylor Revamps Men's Department



  • "Lord & Taylor has turned its attention to men’s wear. The department store has doubled the square footage devoted to men’s at its New York flagship this fall, adding a second floor of selling space. The expansion, which brings men’s to 100,000 square feet, is designed to capitalize on the growing importance of the sector and has thrust the store firmly into the contemporary market."


BURL - Burlington IPO Bows With Strong Demand



  • "Shares of Burlington Stores Inc. shot up 47.1 percent to $25.01 in the retailer’s first day of trading as a public firm on Wednesday after the shares were priced at $17 the night before. Shares hit an intraday trading high of $25.62."





  • "Appleby Trust...announces that it has agreed to sell approximately 3.9 million shares of Sports Direct International plc to Goldman Sachs International."

ICI Fund Flow Survey - Weekly Taxable Bond Flow Rebounds but Year-to-Date Tally Spells Rotation

Takeaway: Taxable bond funds captured their first inflow in 7 weeks; Munis still booked outflows and Domestic Equities experienced redemptions

Investment Company Institute Mutual Fund Data and ETF Money Flow:


Equity mutual funds booked an outflow of $3.5 billion for the 5 day period ending September 25th, a reversal from the $3.3 billion inflow the week prior


Fixed income mutual funds flow improved sequentially W-o-W and resulted in a $1.2 billion inflow, a reversal from the $2.6 billion outflow last week


Within ETFs, passive equity products experienced another large inflow with $7.3 billion coming into the equity category. Bond ETFs also had positive trends, with a $1.3 billion inflow in the most recent weekly period


Within our Hedgeye Asset Management Thought of the Week below, we highlight that despite the short term weekly rebound in bond fund flows in the most recent 5 day period that 2013's year-to-date trends reflect a substantial asset allocation shift from bonds and into equities


ICI Fund Flow Survey - Weekly Taxable Bond Flow Rebounds but Year-to-Date Tally Spells Rotation - ICI chart 1



For the week ending September 25th, the Investment Company Institute reported the first weekly outflow in combined domestic and world stock funds in 4 weeks and the first inflow for combined taxable and tax free bond funds in 9 weeks. Total equity fund flow totaled a $3.5 billion outflow which broke out to a $196 million inflow into international equity products and a $3.7 billion outflow in domestic stock funds. These trends decelerated from the prior week's total equity fund inflow of $3.3 billion and the outflow in domestic stock funds was the largest since the first week in May. Despite this weak 5 day period for stock fund flows, the year-to-date weekly average for 2013 now sits at a $2.5 billion inflow for total equity mutual funds, a substantial improvement from the $3.0 billion outflow averaged per week in 2012.


On the fixed income side, bond funds showed some fighting spirit for the week ending September 25th with the aggregate of taxable and tax-free bond funds booking a $1.2 billion subscription, the first combined inflow in 9 weeks. The taxable bond category lead the charge with a $1.5 billion inflow, which washed over the $289 million outflow for tax-free or municipal bonds. While the slight inflow in the most recent period is encouraging for the bond market, the 2013 weekly average for fixed income fund flow has still drastically declined from 2012, now averaging a $474 million weekly outflow this year, a far cry from the $5.8 billion weekly inflow averaged last year.


Hybrid funds, or products that combine both fixed income and equity allocation, continue to be the most stable category bringing in another $1.2 billion in the most recent weekly period, an slight decline from the $1.5 billion inflow the week prior. The year-to-date weekly average inflow for hybrid products is now $1.6 billion for '13, almost a 100% increase from 2012's $911 million weekly average.



ICI Fund Flow Survey - Weekly Taxable Bond Flow Rebounds but Year-to-Date Tally Spells Rotation - ICI chart 2

ICI Fund Flow Survey - Weekly Taxable Bond Flow Rebounds but Year-to-Date Tally Spells Rotation - ICI chart 3

ICI Fund Flow Survey - Weekly Taxable Bond Flow Rebounds but Year-to-Date Tally Spells Rotation - ICI chart 4

ICI Fund Flow Survey - Weekly Taxable Bond Flow Rebounds but Year-to-Date Tally Spells Rotation - ICI chart 5

ICI Fund Flow Survey - Weekly Taxable Bond Flow Rebounds but Year-to-Date Tally Spells Rotation - ICI chart 6



Passive Products:



Exchange traded funds experienced positive trends in both equities and fixed income for the week ending September 25th. Equity ETFs gathered up $7.3 billion in investor funds, another strong week off of the back of the $25 billion inflow last week. Including this week's production, 2013 weekly average equity ETF trends are averaging a $3.6 billion weekly inflow, an improvement from last year's $2.2 billion weekly inflow average.


Bond ETFs also had a positive week with a $1.3 billion inflow, which was an improvement from last week's $850 million subscription. Including this improved weekly flow within passive bond products, the 2013 weekly bond ETF average is flagging at just a $413 million inflow for bond ETFs, much lower than the $1.0 billion average weekly inflow from 2012.



ICI Fund Flow Survey - Weekly Taxable Bond Flow Rebounds but Year-to-Date Tally Spells Rotation - ICI chart 7

ICI Fund Flow Survey - Weekly Taxable Bond Flow Rebounds but Year-to-Date Tally Spells Rotation - ICI chart 8



HEDGEYE Asset Management Thought of the Week - Year-to-Date Trends Reflect Rotation from Bonds and into Stocks:


With the third quarter of 2013 essentially in the books (although the ICI fund flow data is only through September 25th of this year), a longer term perspective of mutual fund flow and also ETF subscriptions relays an investable shift from fixed income and into stocks. First looking at the ICI mutual fund data, shows the first combined total equity inflow (combining both domestic and world funds) since 2007 of $106 billion and the current running $11 billion inflow into domestic stock funds is the first positive year in U.S. stock fund flow since 2006. World equity fund flow of $95 billion thus far in 2013 is also the best year since '07 but it is unlikely with just 1 quarter left this year that the appetite for foreign stock funds will surpass the $139 billion record from '07. Hybrid mutual fund products however have already well surpassed last year's record production of $45 billion in inflow and thus 2013 has been a break out year for products with both stock and bond allocations. On the fixed income side, the combination of a slight $14 billion inflow in taxable products is being overwhelmed by the $37 billion outflow in tax-free or municipal products. Thus the combined net outflow of $23 billion is well off of the $303 billion net inflow from 2012 and a far cry from the all time record year of $379 billion in net inflow from 2009. This year's running bond outflow is the first annual withdrawal from the asset class since 2004 according to the ICI.


From a quarterly perspective, the net inflow for 3Q13 into equities is continuing the good start to the year experienced in 1Q for both domestic and world stock fund products. The net outflow of $56 billion in bonds (a combination of $28 billion in taxable funds and the $27 billion which came out of municipal bonds) was the worst quarterly outflow since the Financial Crisis in 4Q 2008. While the prospective outlook for bond fund flows will in large part be driven by the communication from the U.S. central bank on ongoing quantitative easing, we note that in our recent launch of the asset management sector we outlined a potential $1 trillion shift between the stock and bond asset classes if the outstanding capital stock percentages within equities and fixed income normalizes. Our research on this topic can be found here.  Within passive ETF products, the 2013 year-to-date perspective is showing another record year for equity ETFs with a $129 billion inflow brewing currently. This is on top of the prior record of $117 billion from last year in 2012. The weakness in fixed income is also being picked up in passive fixed income products with just a $15 billion inflow thus far in the first 3 quarters of '13, a substantial decline from the record bond ETF inflow last year which produced over $56 billion in net investor subscriptions. With the ongoing reallocation out of gold, commodity ETFs namely the GLD have produced sharp outflows for 2013. In the first 3 quarters of this year, commodity ETFs have seen over $20 billion withdrawn from the category, the only negative annual period within Bloomberg ETF data. With this asset allocation shift from fixed income and into equities we continue to relay our best ideas in the asset management sector as T Rowe Price (TROW) on the long side to capture nascent equity fund flow and that we would avoid or short shares of Franklin Resources (BEN) with a large exposure to declining bond fund trends.



ICI Fund Flow Survey - Weekly Taxable Bond Flow Rebounds but Year-to-Date Tally Spells Rotation - ICI chart 9

ICI Fund Flow Survey - Weekly Taxable Bond Flow Rebounds but Year-to-Date Tally Spells Rotation - ICI chart 10

ICI Fund Flow Survey - Weekly Taxable Bond Flow Rebounds but Year-to-Date Tally Spells Rotation - ICI chart 11

ICI Fund Flow Survey - Weekly Taxable Bond Flow Rebounds but Year-to-Date Tally Spells Rotation - ICI chart 12





Jonathan Casteleyn, CFA, CMT







Joshua Steiner, CFA



Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Obama/Bernanke Burning Bucks

Client Talking Points


Are Ben Bernanke and Barack Obama trying to burn the US Dollar’s credibility at the stake? Because if they are, they are doing a darn good job of it. In case you turned your head away, the US Dollar Index continues to implode. That, combined with #RatesFalling, is a bearish leading indicator for US growth. Period.


The only thing more dangerous than Syria to rising Oil prices is this aforementioned Bernanke/Obama combo. Take a look back over economic history: No US President or Fed Chief has overseen a lower US Dollar and higher Oil price over their respective tenures. Brent is back above our TAIL risk line of 108.57. As always, we are watching this closely.


Alas, it's not all doom and gloom this morning. On a cheerier note, take a look at China’s September Services PMI print. It was the best in the global macro data pack this morning coming in at 55.4 vs 53.9 in August. China’s stock market is closed, but the Hang Seng liked that and rose +1%. For the record, we’re long China now via FXI.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.


Health Care sector head Tom Tobin has identified a number of tailwinds in the near and longer term that act as tailwinds to the hospital industry, and HCA in particular. This includes: Utilization, Maternity Trends as well as Pent-Up Demand and Acuity. The demographic shift towards more health care – driven by a gradually improving economy, improving employment trends, and accelerating new household formation and births – is a meaningful Macro factor and likely to lead to improving revenue and volume trends moving forward.  Near-term market mayhem should not hamper this  trend, even if it means slightly higher borrowing costs for hospitals down the road.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


FX: Euro punching a fresh new high of 1.36 vs Bernanke and Obama's Burning Buck @KeithMcCullough


I try to do the right thing with money. Save a dollar here and there, clip some coupons. Buy ten gold chains instead of 20. Four summer homes instead of eight. -LL Cool J 


Shares of electric car maker Tesla (TSLA) slumped 6% on an Baird analyst downgrade yesterday. That said, Tesla is still up more than 450% in 2013.

October 3, 2013

October 3, 2013 - dtr



October 3, 2013 - 10yr

October 3, 2013 - nik

October 3, 2013 - SHCOMP

October 3, 2013 - euro


October 3, 2013 - oil


October 3, 2013 - VIX

October 3, 2013 - dxy

October 3, 2013 - natgas

October 3, 2013 - gold
October 3, 2013 - copper







Macau grossing gaming revenues rose 21.4% YoY in September to MOP 28.963 billion (HKD 28.12 billion, USD 3.63 billion).



Macau CEO Chui Sai On said that there will be no changes to the regulations concerning croupiers.  Chui’s words were corroborated by the Secretary for Economy and Finance, Francis Tam, who even said it was “awkward” that the issue was being raised.  The Secretary doubted the accuracy of predictions indicating the need for 10,000 more croupiers. “Do you think that so many will be needed?” he fired back at a journalist.



The government has yet to publish the names of casinos that failed a second round of checks on air quality in their designated smoking zones because some have disputed the findings.  Secretary for Social Affairs and Culture Cheong U said, "The reason for the delay is that we have received some appeals.”



Official data show 124,499 visitors arrived on October 1, down 6% YoY.  But the Macau Government Tourist Office data show 102,227 of the visitors were mainlanders, +16% YoY.  The mainland’s ban on cheap package tours – run by operators that recoup their costs by compelling tourists to shop in shops that pay commission – came into force on October 1.  Anecdotal evidence suggests the ban appears to have had some effect on visitor numbers.

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