• run with the bulls

    get your first month

    of hedgeye free


(Currency) War!

Client Talking Points


I didn’t think they would cut. But when they did, I sold everything Europe. I have no patience whatsoever for these people doing stupid things. Cutting rates while growth was accelerating? Just incredible. Euro Down = European Stocks Down, for now. Our EUR/USD TREND line of support ($1.34) is credibly and deservedly under attack.


Note to the Fed and ECB: All Asian growth markets have done nothing but go down since September's "No-Taper" decision in the U.S. and yesterday’s ECB rate cut decision. From the mid-September highs, Japan’s Nikkei is down -4.6%. The Shanghai Composite is down -6.7%. All of a sudden, the Yen is losing the currency war versus Fed and ECB!


In related news, the U.S. bond market took that ECB cut as another US #GrowthSlowing signal yesterday. (Incidentally, it is easy to slow from 2.84% GDP). Witness a nice move higher in bonds (not in the higher beta Gold trade). It's actually fascinating to watch this un-elected and un-precedented currency war play itself out. This morning's U.S. jobs report up next. 2.63% is the Hedgeye TREND line for the 10-year Treasury.

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


U.S. Stocks Are Not ‘Bubbly,’ Says JPMorgan’s Lee. Funny - he said the same thing in mid 2008 @zerohedge


“People generally see what they look for, and hear what they listen for.” -Harper Lee, To Kill a Mockingbird


According to a recent Gallup poll, a whopping 70% of American workers have "checked out" at work, and 20% actively hate their jobs.

FNP: Everyone's Price Targets Are Too Low

Takeaway: FNP gave us all the ammo we need to stick to our guns that this stock is on its way to $40, then $75, then higher.

Conclusion: FNP remains one of our top ideas, and as we stated Wednesday, we think that a $40 price tag next year will be a simple checkpoint on its way to $75. We've got to admit, we were half-hoping for a sell-off on the (usual sloppy) GAAP numbers, as this is a classic 'add on weakness' stock. We initially thought we'd get it, as the margin performance was less than inspiring, and the GAAP EPS number missed by $0.02. But clearly that sell-off did not happen. The market is finally at a point where it gives a free pass to (i.e. it doesn’t care about) anything that's not Kate Spade, and it lauds management's capital infusion into Kate -- even if it comes with margin degradation. Our take on the company and the stock is almost identical to what it was before the print -- except that we took our numbers (which were already the highest on the Street) up by about 10%. We remain extremely bullish on FNP, and though we'd ideally like to buy more on a pullback, we're increasingly doubtful -- at least from a fundamental vantage point -- that we'll get that chance.


Here's our key modeling assumptions that get us to $1.85 by 2018.

  1. In addition to Juicy being kicked out of the portfolio by mid-'14, we assume that both Lucky and Adelington are sold off by the end of '14. We assume $475mm in gross proceeds for the pair.
  2. Proceeds go to pay down debt, leaving FNP (net) debt free by 2015.
  3. We assume the Corporate comes down from its current $66mm run rate to $50mm by the end of next year. We're going against the grain with management's comment that corporate will be 4-5% of sales. You don't boot 58% of revenue without taking a commensurate whack out of overhead. We know management is hyper focused on this. Ultimately, a 24% cut in Overhead (to $50mm) with a 58% cut in revenue seems fair.
  4. We assume that Kate Spade goes from 196 stores today to 551 over our modeling time horizon.
  5. On top of that, we have sales productivity going from about $1,200/square foot today to $2,000. This is completely doable for Kate Spade and Jack Spade. We're on the fence with Kate Spade Saturday, as it targets a customer that does not have the same level of disposable income. Nonetheless, if Saturday becomes such a meaningful part of the mix and dilutes price point, our store addition numbers will prove conservative. Six of one, half dozen of another.
  6. We conservatively assume that new Kate stores open at 40% of the productivity level of existing stores.
  7. We've got Kate's EBITDA margins going from 16%-24%. There's about 4% of 'DA' in there, so we're really talking an EBIT margin of 20%. We're extremely comfortable with this given the 29% level at KORS and 31% at COH (even though COH should be closer to 20% in order to actually grow its revenue).
  8. We assume that streamlining charges (which we're getting tired of) go away at the end of 2014.
  9. We've got interest expense turning into interest income. Only $6mm per year…but hey, they're coming off of $48mm in annual debt service. It matters.
  10. While this won't be a share repo machine (it's all about growth) we have the share count beginning to come down in 2015 as FNP uses some cash to pluck away at its share count.
  11. Growth is expensive, so in our cash flow assumptions, we have capex going from 5.5% of sales today to 10% off a much higher sales base. That equates to around $200mm. We're all for that level of spend. The returns are clearly there.



FNP: Everyone's Price Targets Are Too Low - fnpmodel1


FNP: Everyone's Price Targets Are Too Low - fnpmodel2




FNP: 3-Bagger. Add on Weakness


Even after the big move we still think that FNP is a BIG idea, with 3x upside over a 3-4-year time period. That said, we’re neither here nor there on tomorrow’s print. Here’s our thinking into tomorrow…

  • FNP remains one of our favorite TAIL ideas, as we think that 1-2 years out the stock starts with a 4 (versus $27.66 today).
  • But we don’t feel strongly about it one way or another headed into tomorrow’s print.
  • This company gives guidance based on what it thinks it can hit, not on what it can beat. Our point is that if we want to get sucked-in to the game of ‘beat by a penny/miss by a penny’, this can literally go either way.
  • There’s not likely to be an announcement on the sale of Lucky or Adelington with the release, though we’ll likely get added color on terms surrounding the previously announced sale of Juicy. All in, don’t expect any thesis-shifting strategic announcements.
  • Our bigger picture call is simple. Kate Spade (which accounts for all of FNP’s EBIT) is going from $700mm in revenue at a 12% EBIT margin (with leverage), to $3-4bn in revenue at a debt-free 20% margin. We think people have the revenue trajectory partially correct, but they’re still way too low on the margin. In the end, consolidated EBIT will go from break-even (currently hurt by divisions that are on the block) to $800mm. The stock is expensive on earnings today, but is trading at 3.4x its $900mm EBITDA number.
  • The punchline on this name is that an 8x EBITDA multiple on our $900mm EBITDA number gets us to a stock of about $75 vs the current $27.66. It won’t happen overnight, as we all know stock moves aren’t linear, but will grind higher quarter after quarter, year after year.  
  • This has been and will continue to be the perennial ‘I missed it’ stock for investors, who subsequently watch it go up another 25% in their face.






According to Health Bureau director Lei Chin Ion, the 16 gaming establishments that failed a second round of tests of the air quality in their smoking area must reduce their smoking areas by 10%.  Lei said they must improve the air quality throughout their premises.  He said the smoking areas might be reduced by January.  Most of the casinos that failed the tests are run under SJM.

Failing casinos: Golden Dragon, StarWorld, Jimei, Emperor Palace, Lan Kwai Fong, Club VIP Legend, Kam Pek, Diamond, Grandview

Failing slot-machine parlours: Mocha Hotel Royal, Mocha Hotel Taipa Square, Mocha Marina Plaza, Mocha Golden Dragon, Mocha Hotel Sintra, Mocha Lan Kwai Fong and Mocha Hotel Taipa Square



Lim Tze Chean, a RWS senior executive has been fined S$100,000 for breaching the Casino Control Act on three counts.  Chean admitted to one count of providing misleading information to regulators and two counts of destroying the company's log entries.  At the time of the offences, Lim was a vice-president of VIP services at the gaming services department of RWS.  He is currently director of the projects department at RWS.

Between May and July 2011, Lim gave misleading information to the authorities during investigations.  He also destroyed log entries that showed RWS had issued complimentary Universal Studios Singapore tickets to patrons who renewed their annual levies.  Lim is one of three individuals charged in September last year for doing so.



Japan's biggest property developer Mitsui Fudosan Co has joined forces with media firm Fuji Media Holdings and builder Kajima Corp to develop a proposed casino and resort complex in Tokyo.  


The three firms want to build a complex in Odaiba, near Tokyo Bay, that would include a hotel, conference center and a casino.  That plan hinges on the passage of the law and Tokyo being chosen to host a casino. Japan's biggest city is seen as a prime location for an integrated resort, but it is likely to face competition from more than a dozen other locations across the country.  


Mitsui Fudosan, Fuji Media and Kajima all declined to give further details on the project beyond saying that they had submitted a proposal to the government to develop a casino resort as part of a special economic zone.  A group of more than 100 lawmakers, many from the LDP, will meet on Tuesday to finalize plans for an initial bill which they plan to submit during the current parliament session that ends next month.

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

November 8, 2013

November 8, 2013 - Slide1



November 8, 2013 - Slide2

November 8, 2013 - Slide3

November 8, 2013 - Slide4


November 8, 2013 - Slide5

November 8, 2013 - Slide6

November 8, 2013 - Slide7

November 8, 2013 - Slide8

November 8, 2013 - Slide9

November 8, 2013 - natgas

November 8, 2013 - Slide11
November 8, 2013 - Slide12


Sick and Tired

“I’m getting sick and tired of doing anything half-way.”

-Knute Rockne


Forget about these unaccountable bureaucrats that bombard your #OldMedia channels every day and take some real advice from one of America’s real legends. Got growth and progress? Rockne gave American football the forward pass. God bless his soul.


I’m not sure what I am going to write about this morning. So I guess I’ll just keep writing and see what happens. As you know, I’m sick and tired of these half-baked econ PhDs trying to centrally plan our lives.


The ECB cutting rates and devaluing The People’s currency as European growth is accelerating (not a typo) took my level of disgust up another notch yesterday. I didn’t think that was possible. I guess I thought wrong.


Back to the Global Macro Grind


Like the Fed, the European central planners thought that cutting rates was going to “stimulate growth”, or something like that. Meanwhile, the market’s reaction to yesterday’s European rate cut “news” was global #GrowthSlowing.




Yes. Much like the “growth” style factor being for sale in US Equities ever since the Fed’s unaccountable decision not to taper (Financials down, Staples/Telcos straight up), that’s precisely how Mr. Market voted, worldwide, after the ECB rate cut:

  1. US Growth Stocks got killed yesterday (Nasdaq -1.9%); Russell2000 now -3.7% from its YTD high
  2. European Growth Stocks stopped going up (yes, we sold everything on the ECB “news”)
  3. Asian Stocks continued lower overnight – China and Japan down another -1.1% and -1.0%, respectively

Actually, since the Fed’s slow-growth-no-taper decision and ECB rate cut, from their recent highs:

  1. China’s Shanghai Composite Index is -6.7%
  2. Japan’s Nikkei is -4.7%
  3. US Growth Stocks like Facebook (FB) and Tesla (TSLA) are -12% and -27%, respectively

But don’t tell any of these academic wonks of the Keynesian empire that. They fundamentally believe that Deflating The Inflation (from the world record inflation they perpetuated via currency devaluation in 2011-2012) is now the world’s greatest threat.


No. To be clear, their most recent policy moves are the new threat. Deflating The Inflation is not “DEFLATION!” The 2-stroke engine of 1. #StrongCurrency and 2. #RatesRising stimulates consumption growth via a consumption TAX CUT.


How else do you want to explain the recent Q313 rip in US #GrowthAccelerating from 0.14% in Q412 to +2.84%? Up until Bernanke decided to interrupt the 2-stroke engine (also known as economic gravity) with a no-taper, Down Dollar, Down Rates move, the US economy had its best sequential (3 quarter, 9 month) move in half a decade!


And now guess what the market thinks might happen next?

  1. US Growth’s GDP slope slows from 2.84%!

Do you need another exclamation mark? Are you sick and tired of reading this yet? Or are you Fed Up with waking up in the morning to these politicians trying to fear-monger you about “default risk” and “deflation”?


Now I know what I am writing about.


I’m writing about what real people in the real world are talking about – not this Keynesian/Marxist central-planning-anti-dog-eat-dog-gravity-smoothing crap.


As Ben Stiller recently said, “there’s always an element of fear that you need to work until people get sick and tired of you … or that you finally figure out that you are a fraud after all.”


Are these un-elected people at the Fed and ECB frauds? Or are they just completely bought and paid for by the Bond Bull Lobby and currency debauchery camps?


I don’t know. But I do know that Draghi worked at Goldman. And I also noticed that Goldman just had the worst FICC (Fixed Income, Currency, Commodity) quarter in the Federal League…


Was Goldman’s prop and/or FICC team choking on too much illiquid bond and currency bubble paper that they finally had to start taking some marks?


Why is Goldman’s Hatzius such a raging dove? Why is he trying to scare the hell out of the Fed on #RatesRising when his own desk is saying the opposite? Why is he all of a sudden lobbying for the Fed to change the goal posts on a lower “unemployment” target?


Who can really get out of any of these bubbles (MBS, REITS, etc.) that Bernanke backstopped? How will it end? Or are they trying to convince you, like they did in late 2007, that nothing could possibly go wrong?


I’ll stop writing and end with a message sponsored by both Republicans and Democrats who have empowered the Fed (and encouraged the BOJ and ECB) to devalue your hard earned currency:


“If you’re sick and tired of the politics of cynicism… come and join this campaign.”

-George W. Bush


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


UST 10yr Yield 2.49-2.70%



USD 80.32-81.36

Euro 1.33-1.35

Pound 1.60-1.62


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Sick and Tired - Chart of the Day


Sick and Tired - Virtual Portfolio