Bennie and the Jobs

Client Talking Points


Someone always knows something. The way Oil, Gold, and Silver are acting (Bernanke Dollar Devaluation carry trades of the century), this jobs print could be a beat. West Texas Intermediate snapped our Hedgeye TAIL risk line of $101.37 – that’s fresh. Silver is down -1.1% ahead of this morning's print. More to be revealed.


Despite what Ben Bernanke just tried doing to it, the U.S. Dollar still held its long-term TAIL line of $79.21 support. That line is of paramount importance. It matters more than any other macro line in my multi-factor model. So this jobs report does too. The 10-year US Treasury Yield TREND support is a close second behind the dollar. It's at 2.57%.


Question: Why do emerging markets love Bernanke Burning the Buck? Simple. It gives them their currency back. A stronger Real is taking consumer inflation down sequentially in Brazil. The Bovespa likes that until it doesn’t. Witness the breakout yesterday over 54,515 TREND. The U.S. Dollar needs to be pressured further for that to hold.

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


Someone always knows something - we'll see if Mr Macro Market has this jobs preview right @KeithMcCullough


"The Federal Reserve is not currently forecasting a recession." -Ben Bernanke on January 10, 2008


Since the Federal Reserve was created, the U.S. dollar has declined in value by more than 95 percent and the U.S. national debt has gotten more than 5000 times larger.


2013 should be ok but watch out for 2014



RCL reports Q3 on Thursday and we expect a Q3 beat but no change to FY 2013 guidance.  But it's not 2013 we are worried about.  The key question is how much guidance will management provide on FY 2014.  Carnival surprised investors by prematurely providing disappointing revenue yield guidance for 1H 2014 in its F3Q earnings release.  Last October, RCL, without providing numbers, expressed optimism on 2013 booked load factors and average per diems. While it is in management's nature to spin positively, we believe 2014 commentary will be cautious, particularly for the 1st half.  Our recent Cruise Price Survey (published yesterday) certainly indicated that caution is warranted.


3Q and 2013

In late August, Celebrity Millennium cut short its summer season by canceling four Alaska cruises and going into dry dock for four days after multiple propulsion problems.  We think the Celebrity Millennium problems impacted 3Q yields by 0.4% and EPS by four cents.  Including the Celebrity Millennium problems, for 3Q, we forecast 1.8% net yields (constant currency), at the high end of company guidance (+1.0% to +2.0%), and $1.69 EPS (within RCL guidance of $1.60-$1.70). Weak Alaska and China/Japan performance would be offset by strong results from Europe. Onboard and other yields should continue to outperform ticket yields.  


As for 2013, including the impact from Celebrity Millennium, we expect EPS of $2.32 and net yields (constant currency) of 2.5%. 



As we noted in "SHIPS OF STOOLS NO LONGER? (WITH CHARTS)," 2014 pricing may not be as robust as analysts expect.  In particular, Alaska and Europe have been lagging.  Digging in further for Alaska, we're seeing a 50% price discount for the troubled Celebrity Millennium brand for summer Alaska trips, which is dragging down pricing for the rest of the Celebrity fleet as well as the Royal Caribbean brand.  As an aside, Princess (a CCL brand) is usually regarded as the major competitor to Celebrity in the Alaska premium market and based on our survey, their prices have seen substantial gains recently for summer 2014.  In addition, Europe is troubling for RCL as pricing is off by double-digits across the fleet. We're particularly worried about the deteriorating Pullmantur brand, which is struggling in both the Caribbean and Europe markets.  


RCL's cost guidance should be interesting.  In its previous conference call, RCL said it was targeting flat net cruise costs ex fuel for 2014.  Given a very competitive promotional environment in the Caribbean, that would be a worthy feat.  It would be the lowest cost metric growth since 2010.


For 2014, we're projecting 1.7% net yield growth (constant currency) and $2.88 in EPS, below Street estimate of 2.5%-3.0% (constant currency) yields and $3.07 EPS, respectively. 



What's New Today in Retail (10/22)

Takeaway: Sales finally pick up. Adi takes a swing at NKE w new sportswatch. Reebok sucking wind. KSS joins M/JCP on Thanksgiving. Labor costs rise.



TJX - Investor Meeting: Tuesday 10/22 1:30 pm




ICSC - Chain Store Sales Index


Takeaway:  This is the first time in over a month we saw the growth in sales (per ICSC) come in ahead of last year. Not hugely so, but we'll take it.


What's New Today in Retail (10/22) - chart1 10 22

What's New Today in Retail (10/22) - chart2 10 22




JCP - Martha Stewart Revises J.C. Penney Deal



  • "The new agreement essentially reverses the bulk of the Penney’s-MSLO deal. Now it features a more focused range of product categories over a shorter period of time, through June 30, 2017, versus the original deal, which would have expired in 2021."
  • "Neither MSLO nor Penney’s would provide further details of the financial terms of the deal, but they said Penney’s would sell through any unbranded product at issue in the Macy’s case and that it would not manufacture any more."
  • "Under the new deal, MSLO will continue to design Martha Stewart branded products for Penney’s in the following categories: window treatments and hardware, lighting, rugs, holiday and celebrations. These categories were not disputed in the Macy’s lawsuit."
  • "MSLO will receive design fees, guaranteed minimum royalties and the 11 million shares of MSLO Class A common stock that Penney’s currently owns. Additionally, Penney’s will no longer have representation on MSLO’s board. Penney’s paid $38.5 million for the MSLO shares."


Takeaway: This is a CYA move for MSLO. Judge Oing was going to squash the JCP arrangement if nobody got off their tail and proactively found a solution on their own. This solution is actually an upgrade for JCP, as we had previously assumed that its Martha product went to zero.


ADS - Adidas Creates New U.S. Model, Becker Exits Reebok



  • "Patrik Nilsson, currently head of Adidas North America, will head up a joint group that covers Adidas North America and Reebok. He also will take on global responsibility for the Reebok-CCM Hockey brand." 
  • "Uli Becker, president of Reebok North America, has decided to leave the company. The changes are effective immediately."


Takeaway: Translation = Reebok is still sucking wind, and it needs to be 're-German-engineered'.


ADS - Adidas Arms Up for Smartwatch Wars



  • "The Adidas watch will retail for $399 when it becomes available on Nov. 1. It includes GPS tracking technology, wrist-based heart monitoring, a Bluetooth-enabled music player, and use of Adidas’ live coaching service, miCoach."
  • "Mr. Gaudio said the watch was developed for runners who don’t like the idea of bringing along their phone on runs, and who use that time to disconnect. Two key features of the watch are, in fact, components it doesn’t have: Unlike gadgets offered by Samsung and Nike which work in conjunction with smartphones, the miCoach Smart Run functions as a standalone product. Further, its heart rate monitoring is conducted on the wrist, eliminating the need for a traditional separate chest strap."


What's New Today in Retail (10/22) - chart3 10 22


Takeaway: Nike currently has its Nike+ Sportswatch that it built 2-years ago in conjunction with TomTom. It has GPS, tracks cadence, laps, splits and has a solid alarm. All of that said, this Adidas watch appears to blow it out of the water. That said, Nike's sells for $169, and Adidas is $399.  On a relative value basis, Nike still might come out ahead.  Either way, expect NKE to up the ante on its product to beat Adidas -- and it will likely do so at the same sub $200 price.


TJX - TJX to Boost Store Outlook



  • "The off-price giant boosted its earnings outlook and said it would raise its estimates for long-term store growth at an investor meeting Tuesday."
  • "TJX said its sales and profit margins so far this quarter were strong and raised its adjusted earnings estimates to 73 cents to 74 cents a diluted share — up from the 69 cents to 72 cents projected this summer. Comparable-store sales are slated to rise 4 percent."
  • "For the full year, TJX is now projecting adjusted earnings of $2.78 to $2.82 a diluted share, up from an adjusted $2.47 in 2012."


Takeaway: Nice, but nothing that people were not expecting ahead of the company's analyst meeting -- which is being held today.


KSS - Kohl’s to open 8 p.m. Thanksgiving; digital efforts include Santa photo op



  • "...Kohl’s Department Stores announced it will open its doors at 8 p.m. on Thanksgiving Day,  kicking off its Black Friday event earlier than ever."
  • "Stores will be open for 28 hours straight – from 8 p.m. Thursday, Nov. 28 through midnight Friday nationwide."
  • "The retailer is also offering a digital variation on the photos with Santa tradition.  Starting in November, shoppers can skip the long lines to visit Santa at the mall by taking a photo at Kohl’s Snapshots with Santa in-store photo opportunity in Kohl’s stores nationwide."


Takeaway: KSS matches store hours at Macy's -- a day after JC Penney did the same. We still think this is a risky move. The number of people that will shop on Thanksgiving is unknown, and the costs of manning the stores will be immense (late night and on a holiday equals double time at least).


KER - Kering ready to inject 300 mln eur in La Redoute



  • "...Kering is ready to inject at least 300 million euros ($411 million) into its La Redoute unit as part of efforts to find a buyer for the loss-making mail order business, two sources close to the matter said."
  • "Three potential purchasers have requested further information about La Redoute, though Kering has not yet received any firm offer, the sources told Reuters on condition of anonymity."
  • "La Redoute is the last of Kering's retail businesses, which it has been shedding to focus on luxury goods and sportswear. Its exit from the retail industry began with the disposal of department store Printemps in 2006."




Bangladesh Minimum Wage Dispute Finally Nears Resolution



  • "After repeatedly halted negotiations, workers and factory owners in Bangladesh seem to be finally arriving at a negotiated compromise over wages. It looks like the minimum wage will be set at Tk 5,000 per month, significantly lower than the workers’ original demand for Tk 8,114 but much better than the owners’ first offer at Tk 3,600."


Takeaway: This is a win for labor, and a loss for everyone else. Someone's going to have to pay for the increased cost -- either manufacturers, brands, retailers, or consumers. Manufacturers will bear at least half. The remainder will be split by brands and retailers. Consumers won't see a penny.


Swiss Watch Exports Rise 8.5%



  • "Swiss watch exports rose 8.5 percent in September, their highest monthly increase since January, helped by favorable calendar and base effects, the Federation of the Swiss Watch Industry reported."
  • "Foreign sales of Swiss timepieces totaled 1.9 billion Swiss francs, or $2.06 billion at average exchange rates for the period…"
  • "While China continued to lose ground with a decline of 3 percent, Hong Kong and the United States confirmed recent signs of recovery with increases of 10 percent and 17.4 percent respectively. Germany posted a rise of 8.7 percent and Japan was up 9.2 percent, but Italy recorded a 1.4 percent decrease."

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Takeaway: Court’s ruling means big refund for Borgata and higher profits ahead

The bad news:  The Tax Court of New Jersey thinks that Borgata is worth 61% less than previously.  The good news:  who cares because that means Borgata is getting a property tax refund of an estimated $40-50 million for 2009/2010 and likely a similar amount for 2011/2012.  Importantly, that could mean net EBITDA gains of $20-25 million annually beginning in 2013.


In our 9/13/13 note, “CATALYSTIC BYD”, we highlighted this ruling as a potential catalyst.  However, we had estimated the refund at $40-50 million for 4 years, not 2.  Assuming BYD wins on appeal, this catalyst is much bigger than even we had imagined.


So what is this worth to BYD?  Assuming the $40-50 million is correct and doubling it to reflect 2011 and 2012, that alone increases the value of BYD’s stock by $0.23-0.29 or 2% (BYD owns half of Borgata).  Going forward, the $20-25 million annual tax reduction at Borgata is worth another $0.83-1.03 in value to BYD’s stock price or 6-8%.  If it holds up on appeal, the New Jersey tax situation could be an 8-10% catalyst to the value of Boyd Gaming stock.


Maybe the only certainty in life are death and taxes, but lower taxes means more life for this catalystic stock.


Dear Mother

This note was originally published at 8am on October 08, 2013 for Hedgeye subscribers.

“You know, men do nearly all die laughing”

-T.E. Lawrence


As a young enlightened man in the field of war in the Middle East, that’s what T.E. Lawrence wrote to his Mom in 1916. At the time, he was also tasked with writing a weekly letter to the “Mother” (Britain’s War Office) of his homeland. Not surprisingly, this is when he started to “incense his military superiors” with on-the-ground truths (Lawrence in Arabia, pg 125).


“We edit a daily newspaper, absolutely uncensored, for the edification of twenty-eight generals; the circulation increases automatically as they invent new generals. This paper is my only joy. Once can give the Turkish point of view of the proceedings of admirals one dislikes, and I rub it in my capacity as editor-in-chief.” (pg 125)


Ah, the power of the pen. You either have it, or you do not. For an amateur writer like me, I get that my moments are fleeting. But, especially when attacking the tyranny of government spin, I feel as liberated as a man who believes in truth and freedom can feel. That’s why I do this at the top of every risk management morning - to feel free.


Back to the Global Macro Grind


This is not a “free-market.” At least not in its purest definition. At any given moment of the trading day, the government can announce that it is officially saving us from itself. For that, I’ll be damned if I give thanks and praise.


Can money buy your freedom? What if the purchasing power of that “money” is being burned at the stake? What if your money is borrowed from the future of your grandchildren?


These aren’t new questions this morning. Montaigne started asking these questions in 1571 with “Essais” and Shakespeare personified the money/power/freedom conundrum with the Merchant of Venice too.


Can the world’s reserve currency (US Dollar) hold its long-term TAIL risk line of $79.21 support?


It’s still the #1 question in my notebook this morning. And I suspect it will be for some time to come. If you ask Gold, the answer is maybe. If you ask Bernanke, Obama, and Boehner, it’s no.


In addition to the US Dollar’s TAIL risk line imposed upon us by central planners, here are some critical US TREND lines to consider:

  1. US Treasury 10yr Yield = 2.58% TREND support
  2. US Equities (SP500) = 1663 TREND support
  3. US Equity Volatility (VIX) = 18.98 TREND support

That last one is what’s going to drive the other two. For all of 2013 I’ve been Bearish on Fear (VIX). As of the last 2 weeks, that’s changed. I am as afraid of US government intervention in our markets and economies as the VIX has become.


Yesterday’s move on the front-month of fear (VIX) was telling – follow Mr. Market’s flow:

  1. US Equities had a big newsy down-open in the pre-market built on the false media message that the US could “default”
  2. US Bonds and Credit Default Swaps didn’t care about all of the “default” fear-mongering; stocks acknowledge the same
  3. US Equities eventually lifted off the lows and were only down -0.3% by lunchtime

Then …

  1. As the lunch-time lull passed, US Equity market players started to realize that this correction is not just about “default” noise
  2. Almost everything that’s been killing it YTD (Growth Stocks) started to roll over in the early afternoon
  3. Financials (XLF), Consumer Discretionary (XLY), and Small Caps (IWM) all ended up closing down -1.2-1.3% by end of day

And all this happened as US Equity Volatility (VIX) broke out above the @Hedgeye TREND line (18.98) for the 1st time since June. Our process would suggest that there was absolutely no irony in that.


I won’t re-hash the Growth “Style Factors” that I outlined in yesterday’s Early Look again, but the risk management point to embrace was a very simple one. As a market expectation, #GrowthAccelerating has plenty of downside.


The US Government is not going to default on its debt, but it may very well slow growth.


Put another way, the longer that both the fiscal and monetary policy sides of the US House lean on:


A)     Down Dollar

B)     Falling US Interest Rates


The less likely it is that the US economic cycle will be allowed to occur.


Policies to Inflate (devaluing the Dollar) don’t create economic growth; they perpetuate inflation. Under our #StrongDollar + #RatesRising scenario (that may have died 2 weeks ago), inflation is not an issue. Now it is. Mother, be forewarned.


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


UST 10yr Yield 2.60-2.68%

SPX 1671-1685

VIX 16.23-20.15

USD 79.67-80.71

Euro 1.34-1.36

Brent 107.97-109.99


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Dear Mother - Chart of the Day


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