An Eye on China & Germany

Client Talking Points


A major call-out this morning is the Shanghai Composite which is down almost -2%.  This weakness is being driven by the property sector which is under pressure based on local news reports that longer term regulations could be in place soon for controlling property in China. Being the price and market driven analysts we are, the move in Chinese equities this morning is certainly a red flag in our notebooks, but isn’t changing our more positive view on China.  


More good news out of Europe today with European car sales ripping to a 2-year high. Add into the bullish economic mix a fantastic German confidence reading of 52.8 in October versus 49.6 last month This clearly bodes well for German #GrowthAccelerating and dovetails nicely with our Q4 Macro Theme #EuroBulls. Yes - we are long the German DAX.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up. 


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.


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


$DRI Breakup ‘Not the Answer’ Oppenheimer Says - HWP: Do we want more of the same? Give management more time? Seriously? Unbelievable! @HedgeyeHWP


The American Republic will endure until the day Congress discovers that it can bribe the public with the public's money. -Alexis de Tocqueville 


The period from March 2009 to March 2012 was one of the strongest three-year market rallies in history -- stronger, in fact, than the 1996-1999 bull market. 

What's New Today in Retail (10/16)

Takeaway: Footwear picks up –it’s all Nike. Sperry apparel launch. LVMH lux goods slow. M opens on Thanksgiving – binary event. New NKE Fuelband.



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Weekly Athletic Footwear Data -


Takeaway: Here's a shocker…athletic shoe sales last week were up nearly 7%, which marks a 1,000bp acceleration from the prior week -- and the run-rate from the past two months. The key driver was a double in the growth rate for the Nike Brand, and a colossal acceleration in Brand Jordan.


What's New Today in Retail (10/16) - char1 10 16

What's New Today in Retail (10/16) - chart2 10 16

What's New Today in Retail (10/16) - chart3 10 16

What's New Today in Retail (10/16) - chart4 10 16

What's New Today in Retail (10/16) - chart5 10 16




WWW - Sperry Top-Sider to Launch Apparel for Fall



  • "The 78-year-old brand, best known for its boat shoes, has turned to LF USA to launch a men’s and women’s lifestyle collection for fall. The collection will be unveiled to retailers at an event in New York on Thursday."
  • "Paul Raffin, president of LF USA...expects the line to be a $100 million business at wholesale."
  • "The apparel will reflect that same pricing. Tops will retail for $70 to $100 and bottoms from $80 to $100. Outerwear will average $100 to $300, but certain pieces will sell for up to $600."


 What's New Today in Retail (10/16) - chart7 10 16


Takeaway: Like all things with WWW, they're lowballing on the $100mm goal.  Every $100mm grows the Sperry business by about 20%.


M - Macy's stores to open on U.S. Thanksgiving for first time



  • "[Macy's] said on Monday that most of its stores will open on the U.S. Thanksgiving Day holiday for the first time in its history, in a sign of how competitive the holiday season is shaping up."
  • "Macy's will open the doors at most of its 800 namesake department stores, at 8 p.m. on Thursday, November 28. The company said the shift was voluntary for workers and that the move was 'consistent' with what many rivals are doing."


Takeaway: We didn't think that Black Friday could kick off any sooner. On one hand, we question how many people will shop on Thanksgiving. With the exception of the Fourth of July, it is the only major holiday that is literally celebrated by all -- regardless of race or religion. On the flip side, it is going to be tough for all competitors to follow suit -- especially on such short notice. This might give M a little leg up this holiday. On the flip side, the cost to open the store on Thanksgiving will be very high (it's overtime for anyone that punches in). They'd better.


NKE - Nike Unveils Nike+ FuelBand SE



  • "Stefan Olander, Nike Inc.’s vice president of digital sport, unveiled the Nike+ FuelBand SE at a forum in TriBeCa here Tuesday, setting the new model apart from the original, which was released in early 2012."
  • "One of the most significant new features addresses a gripe many had with the band’s first iteration: it wasn’t able to track specific activities. The first version of the band is unable to discern if a user is indoor cycling or going for a run."
  • "The Nike+ FuelBand app will also see an update, including a Groups functionality that allows users to form groups with their friends and easily share fuel data."


 What's New Today in Retail (10/16) - chart6 10 16


Takeaway: These are major improvements to the Fuelband (spoken by a die-hard user). With the old Fuelband, if you wanted to go for a bike ride, you had to clip the bracelet onto your shoelaces, which is a major pain. It also had an accuracy rate of 50-60% for non-running activities -- which is simply ridiculous.


WMT - Wal-Mart Sets Sales Goal of $500B



  • "Wal-Mart Stores...aims for sales of $500 billion by 2016 — without acquisitions. Mike Duke, the company’s president and chief executive officer, revealed the target at Wal-Mart’s annual meeting for the investment community on Tuesday."
  • "...the retailer’s e-commerce activities, which were expected to generate revenues of $9 billion in the current fiscal year, but in May that was raised to $10 billion. is seen having sales of $13 billion in 2014…"


Takeaway: $13bn in sales is a big number, but relative to the size of WMT in aggregate, it actually puts the company at the bottom of the barrel as it relates to e-commerce as a percent of total.


JCP - Penney denies rumor of bankruptcy counsel hire as stock falls



  • "A [JCP] spokeswoman denied a market rumor on Tuesday that the department store chain had hired bankruptcy counsel, as shares slid as much as 8.3 percent."
  • "Penney spokeswoman Kristin Kays said there was 'no truth to the rumor,' origins of which were unclear."


Takeaway: All it takes is a flat-out false rumor to get this stock down 8%. Just goes to show how people shoot first and think second with JCP.


LVMH - LVMH Sales Rise 1.7% in Q3



  • "The French luxury goods giant said third-quarter revenues rose 1.7 percent to 7.02 billion euros, or $9.3 billion, with selective retailing the only business unit logging a double-digit gain, up 12.8 percent."
  • "Stripping out the impact of currency fluctuations and acquisitions, the third-quarter gain stood at 8 percent, LVMH said, noting that only the wines and spirits and watches and jewelry divisions saw growth accelerate from the first half."


Takeaway: Booze and Timing drove sales -- not exactly a bullish statement on its' LV luxury goods business.


HBC - 424 Fifth: Hudson's Bay's New Sportswear Address



  • "Hudson’s Bay Co. has big expectations for its new women’s private-label sportswear brand, 424 Fifth."
  • "Named for Lord & Taylor’s Manhattan flagship address, the sportswear line is designed to rival brands such as Lauren Ralph Lauren, Calvin Klein, Michael Michael Kors and Vince Camuto on the better-price sportswear floor. The lifestyle collection will be carried in 49 Lord & Taylor stores in the U.S. and 92 Hudson’s Bay stores in Canada, as well as online. The line will be unveiled tonight at an event at The Glasshouses here."


Takeaway: A private label brand rivaling Ralph, Calvin and Kors? Sorry HBC, but I'll believe it when I see it.


SCC - Sears Canada’s head office braces for more layoffs under new CEO



"Head office employees at Sears Canada are bracing for more layoffs as the struggling retailer moves forward under its new turnaround specialist CEO…The scope of the pending cuts was not revealed, and no store-level employees will be affected, sources said."


Takeaway: Seriously…does this surprise anyone?


WTSL - The Wet Seal, Inc. Updates Third Quarter Comparable Store Sales and Earnings Per Share Guidance



  • "[WTSL] announced that it is revising its financial guidance for the third quarter of fiscal 2013 ending November 2, 2013. The Company expects to report a comparable store sales increase in the low-single digits and net loss per diluted share in the range of $0.10 to $0.12, before non-cash asset impairments. This compares to prior guidance of a comparable store sales increase in the mid-single digits and net loss per diluted share in the range of $0.02 to $0.03, before non-cash asset impairments."


Takeaway: I can't believe this concept still exists. Just goes to show that retailers can hang on by a thread for far longer than anyone thinks.

Key Takeaways and Quotes from Pipeline Maintenance Expert Call

On 10/15 we hosted an Expert Call with Richard Kuprewicz of pipeline safety consulting firm Accufacts, Inc to discuss transmission pipeline maintenance, safety, and regulation.


Below we list the key takeaways and quotes from the call, and you can listen to the replay HERE.


1.  PHMSA is the main federal pipeline safety regulator; regulation is “minimal.”  Maintenance activity and level of spend are not mandated / regulated.
2.  “Lion’s share” of regulation is “reactive as opposed to proactive.”
3.  Historically, PHMSA’s safety / incident reporting data “has not been very reliable.”  The data “wouldn’t pass an audit test.  You have to be careful not to over-use the PHMSA database, or over-rely on it.”  Pipeline operators enter information into the PHMSA database on their own, “and if [the data] wrong, PHMSA can’t change it.”
4.  Increase in pipeline failures in late 90’s was due to “serious break downs in the management process,” which could have been the result of an “over-focus on cost reduction” and /or “mergers and acquisitions that added chaos to the normal way that the pipelines were historically managed.”
5.  “You think it’s just a pipeline and it’s fairly easy to operate.  But the philosophy of how your operate the pipeline, the importance of safety culture, the importance of the management culture can be a wide spectrum.”  

6.  Some companies have embraced concept of “integrity management,” some have not.  Wide discrepancy in how different companies maintain their systems (no specific companies referenced).


7.  Cost reduction “is more common than I’d like to know about.”  “It’s easy for management to send the signal that we want to cut costs at all expense.  And meanwhile, the risk factors are going up exponentially, and you bet the company.  I don’t say that lightly.”
8.  A lot of effort behind eliminating “grandfathered” maximum allowable operating pressures (MAOP) on natural gas lines.  PHMSA is heading in this direction.


9.  Management of main lines is most important (not the “moving parts”), as that’s where the greatest risk is.


10. Some companies, with an over-focus on cost reduction, “have ordered very important records to be destroyed.”


11. With respect to pipeline age / maintenance, “New isn’t necessarily better than old …  Just because it’s old doesn’t necessarily mean that it would be more expensive to maintain.” 


12. The industry is going through a cycle where it’s losing a lot of its experience (retirees); M&A exacerbates this trend.


13. “Gold-plating” typically occurs after an expensive tragedy …  Just “throw money at it” to make it seem that you’ve solved the problem.  It is “an illusion of safety.”  Gold-plating is not common today.


14. Properly maintained or reconditioned pipe can last, essentially, indefinitely.


15. Data management and understanding is crucial to pipeline integrity management and safety.


Kevin Kaiser

Senior Analyst

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TODAY’S S&P 500 SET-UP – October 16, 2013














  • YIELD CURVE: 2.37 from 2.33
  • VIX closed at 18.66 1 day percent change of 16.12%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: Mortgage Applications, Oct. 11 (prior 1.3%)
  • 10am: NAHB Housing Market Index, Oct., est. 57 (prior 58)
  • 11am: Fed to purchase $1.25b-$1.75b notes 2036-2043 sector
  • 11:30: U.S. to sell $22b 1Y bills; also 4W bills
  • 2pm: Federal Reserve issues Beige Book
  • 4:30pm: API weekly oil inventory
  • 5:30pm: Fed’s George speaks on Fed’s centennial Oklahoma City
  • 6:45pm: Fed’s Fisher speaks in banking in New York


    • Diplomats from China, France, Germany, Russia, U.S., U.K. meet with Iranian counterparts in Geneva for P5+1 nuclear talks
    • 9:30am: House Oversight and Government Reform Cmte, House Natural Resources Cmte joint hearing on National Park Service’s implementation of govt shutdown
    • 2pm: Campaign to Fix the Debt news conference to urge Congress, President Obama to put in place long-term agreement to address the national debt, with former Defense Secretary Leon Panetta, former OMB Director Jim Nussel


  • Senate leaders press toward debt-ceiling deal with U.S. House in disarray
  • IMI sells dispenser business to Berkshire Hathaway for $1.1b
  • Advance Auto Parts may buy General Parts Intl., WSJ says
  • Goldman must disclose gender-bias complaints, judge rules
  • Twitter picks NYSE for IPO; 3Q revenue more than doubles
  • Teva, Celgene bidding >$700m for Receptos, Calcalist says
  • Herbalife loses bid to have class-action lawsuit dismissed
  • Alibaba profit jumps ahead of biggest IPO since Facebook
  • Yahoo’s forecasts missing ests. as Google takes market share
  • Samsung loses bid to block license order in Apple patent case
  • Samsung SDI says in talks with Tesla to supply batteries
  • Apple said to cut low-cost iPhone 5C orders in 4Q, WSJ says
  • Fiat trial on UAW’s Chrysler shares to begin Sept. 2014
  • Suntrust to eliminate 800 mortgage employees, WSJ says
  • Boeing says it’s aware of Air India 787 panel event
  • NXP says Broadcom chips in WiiU infringe upon patents
  • Plains GP’s dividend vehicle LP raises $2.8b in IPO


    • Abbott Laboratories (ABT) 7:44am, $0.51 - Preview
    • Bank of America (BAC) 7am, $0.21 - Preview
    • Bank of New York Mellon (BK) 6:30am, $0.58
    • BlackRock (BLK) 6:30am, $3.88
    • Comerica (CMA) 6:40am, $0.71
    • KeyCorp (KEY) 6:14am, $0.22
    • Mattel (MAT) 6am, $1.11 - Preview
    • MGIC Investment (MTG) 7am, $(0.11) - Preview
    • Northern Trust (NTRS) 7:30am, $0.77
    • PepsiCo (PEP) 7am, $1.17 - Preview
    • Piper Jaffray (PJC) 8am, $0.48
    • PNC Financial Services (PNC) 6:24am, $1.62
    • St Jude Medical (STJ) 7:30am, $0.90 - Preview
    • Stanley Black & Decker (SWK) 6am, $1.38
    • US Bancorp (USB) 6:45am, $0.76
    • Watsco (WSO) 7:30am, $1.34
    • WW Grainger (GWW) 8am, $3.04 - Preview


    • Albemarle (ALB) 4:03pm, $1.07
    • American Express (AXP) 4:04pm, $1.22
    • Core Laboratories (CLB) 4:07pm, $1.34
    • Crown Holdings (CCK) 5:02pm, $1.08
    • CYS Investments (CYS) 4:01pm, $0.32
    • East West Bancorp (EWBC) 5:30pm, $0.54
    • Ebay (EBAY) 4:15pm, $0.63 - Preview
    • El Paso Pipeline Partners (EPB) 4:05pm, $0.47
    • International Business Machines (IBM) 4:05pm, $3.96 -Preview
    • Kinder Morgan (KMI) 4:05pm, $0.31
    • Kinder Morgan Energy Partners (KMP) 4:06pm, $0.60
    • LaSalle Hotel Properties (LHO) 4:04pm, $1.44
    • Noble (NE) 5pm, $0.70
    • SanDisk (SNDK) 4:05pm, $1.33 - Preview
    • Select Comfort (SCSS) 4:01pm, $0.43
    • SLM (SLM) 4:15pm, $0.59
    • Steel Dynamics (STLD) 6pm, $0.24
    • Umpqua Holdings (UMPQ) 4:05pm, $0.26
    • United Rentals (URI) 4:20pm, $1.59
    • Xilinx (XLNX) 4:20pm, $0.53


  • Copper Slides for Second Day as U.S. Fiscal Standoff Continues
  • WTI Fluctuates Near Three-Month Low on U.S. Debt, Iran Talks
  • Crop Futures Gain as Cold and Wet U.S. Weather May Delay Harvest
  • Gold Swings Above 3-Month Low as Talks Resume on Debt Impasse
  • Robusta Coffee Rises Before Options Expiration; Sugar Declines
  • U.K.’s Oat Harvest Seen at 40-Year High on Spring Planting Gain
  • Rebar Falls to 3-Month Low in Shanghai as China’s Stocks Slump
  • China Metals Usage Seen Exceeding Rest of the World in 2017
  • Next-Year Copper Forecast at Low on Oversupply Outlook: BI Chart
  • Cocoa Deliveries in Brazil’s Bahia Drop 3.3%, Hartmann Reports
  • Palm Oil Is Seen Rallying on Moving Average: Technical Analysis
  • Gas Buyers Poised to Commit on South Korea Atomic Shift: Energy
  • Putin Builds North Korea Rail Link to Circumvent Suez: Freight
  • Iron Ore Prices Seen by UBS at Risk of Declining on Steel Output


























The Hedgeye Macro Team



















The government has no plans to relax its cap on live gaming tables, the Gaming Inspection and Coordination Bureau says.  Yesterday, Standard Chartered Bank said the gaming table cap could be relaxed on Cotai. The bank did not cite the source of its information.  A spokesperson for the casino regulator said the reports were based on rumours.


The government permits the number of new tables to grow by an average of 3 percent a year, restricting casino operators to about 2,000 additional tables over the next 10 years.


Moving Day

This note was originally published at 8am on October 02, 2013 for Hedgeye subscribers.

“The great thing in the world is not so much where we stand, as in what direction we are moving.”

-Oliver Wendell Holmes


Yesterday was one of the most humbling days of my professional life. It was Moving Day @Hedgeye. It was our first full day working as a team in our new Stamford, CT studio office space. We had all hands on deck.


I say studio because that’s 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.” More on that as we move forward.


On the humbling part, 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.


Back to the Global Macro Grind


Selfless, objective, flexible – these aren’t the words you’d use to describe the US government this morning. That means we have to overcompensate for their lack of resolve and prepare for whatever direction they try to take our said free-markets next.


Yesterday was a fascinating day on that score because, after the media monetized all the ad sales associated with “shut-down” drama, markets actually traded on the economic data. As Christian Drake pointed out to me just after 11AM EST on our desk, it’s #OctTaper versus Bernanke.


Put another way, it’s economic gravity (the data) vs. he who promises to bend it (Bernanke). And it’s not just the US stock market that is handicapping this battle of data versus un-elected opinion in real-time. Immediately after the USA posted another “surprisingly” bullish US #GrowthAccelerating ISM report for September (56.2 vs 55.7 in AUG), this is what happened:

  1. Gold got tapered
  2. Oil got tapered
  3. Bonds got tapered

This was kind of cool (for us) because we haven’t liked the Gold Bond thing for all of 2013 (we still have 0% asset allocations to both Fixed Income and Commodities; both are down YTD).


But it was also cool for the one thing that consensus missed alongside US #GrowthAccelerating for the past 10 months which is, of course, growth expectations embedded in the US stock market.


That’s right anti-Bernanke-policy-to-try-to-bend-gravity-fans:

  1. US Dollar Stabilizing
  2. And #RatesRising
  3. = all-time highs in US growth expectations (growth stocks)

As The Champ used to say “Pardon?”


Indeed, Sir Champ. All-time is a long time, bro – and the proxy for US growth stocks (the Russell 2000) closed at an all-time high yesterday of 1087. That’s +28.0% for 2013 YTD!


Yes, I’m sure whatever partisan #OldMedia channel you were watching nailed that.


I’m sure every fear-mongering and end #EOW (end of the world) idle threat thrown at The Rest of Us by the #PoliticalClass was a risk managed one based on selfless, objective, and flexible analysis too. Up next on cable, “the sun no longer rises in the East.”


Where to from here?


As I wrote in yesterday’s rant, I have no idea. I’m just saying that it was nice to see Mr. Market rub it in Washington’s nose for a few more hours. Today is simply another day to embrace the uncertainty and volatility of it all.


Key intermediate and long-term (TREND and TAIL lines) to keep front and center into Friday’s jobs report:

  1. CURRENCY: US Dollar Index long-term TAIL support = $79.21
  2. BONDS: US 10yr Treasury Yield intermediate-term TREND support = 2.55%
  3. STOCKS: US Stock Market (SP500) TREND support = 1660

To be clear, while US #GrowthAccelerating has been the surprise of 2013, A) that’s now old news and B) the slope of US growth’s line can go anywhere from here.


That’s what Big Government Intervention does – it shortens economic cycles, and amplifies market volatility. There’s a deep simplicity in understanding that too. So keep moving out there.


Our immediate-term Risk Ranges are now as follows (we have 12 Macro ranges in our Daily Trading Range product):


UST 10yr Yield 2.58-2.68%

SPX 1685-1699

VIX 14.71-16.69

USD 80.02-80.75

Yen 97.04-98.76

Gold 1289-1327


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Moving Day - Chart of the Day


Moving Day - Virtual Portfolio

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%