Becoming King

"Kings are not born, they are made by general hallucination."

-George Bernard Shaw


On this day more than 700 years ago, Robert the Bruce became the King of Scotland.  Robert was one of the most well known warriors of his generation and led the Scots in their wars of independence against Britain. 


Prior to successfully defeating the British, according to legend, Bruce was hiding in a cave on Rathlin Island off the north coast of Ireland. While in the cave Bruce purportedly watched a spider spinning a web in an attempt to connect one area of the cave's roof to another area.  (Clearly, Robert the Bruce had some spare time on his hands.)


 Becoming King - Battle of Bannockburn   Bruce addresses troops


The spider repeatedly failed but after each failed attempt kept turning back to the task at hand. Eventually the spider succeeded.  According to legend, Bruce is said to have used this as inspiration to continue his war against Britain where he eventually inflicted on them a number of critical defeats on the path to Scottish independence.


This story also supposedly inspired the maxim: "If at first you don't succeed, try try try again." 


Back to the Global Macro Grind ...


As the story of Robert the Bruce teaches us, becoming king is not an easy task.  As it relates to asset class performance this year, there aren't a lot of kings in the year-to-date. On a country basis, the top three decliners are as follows:

  • Russia -19.5%
  • Venezuela -14.8%
  • Czech Republic -12.6%

Japan is a close runner up to the top three and comes in fourth with a -11.5% decline on the Nikkei in the year-to-date. Incidentally, the Japanese Mothers Index (more small cap focused) is down a staggering -5.7% today. 


As the reigning King of Russia, Vladimir Putin is certainly learning the pain of trying to broaden his kingdom. On the back of Russia's literal annexation of Crimea, Russian equities are getting clobbered as noted above.


This morning the West is implementing more actions to further alienate Russia. The big symbolic one is that the G-8 summit, which was originally scheduled for Sochi this summer, has now been moved to Brussels and Russia has been uninvited.


In part, this and the myriad of sanctions that have been implemented against Russia are largely symbolic.  No doubt the most significant sanction is the one that has been implemented by the markets themselves as noted above by the almost -20% decline for Russian equities in the year-to-date. To the extent Russian equities continue to decline and Russian companies are challenged to tap the public markets to raise capital, Putin will certainly be wondering whether it is all worth it to become king.


The King of Fed watching, Jon Hilsenrath from the Wall Street Journal, wrote an interesting article yesterday highlighting the odd (for lack of a better word) nature of economic target setting by the Federal Reserve.  According to Hilsenrath, even though the Fed expects a 5.4% jobless rate in 2016, a normalized level, they are still likely to keep interest rates at a level that is well below normal (typically considered 4%-ish on the Fed funds rate).


To the extent this turns out to be accurate, it is likely that we continue to see inflationary assets (Gold) continue to front run this long term dovish policy.  The broader concern, of course, is the arbitrary nature of employment targets such as the jobless rate.  In the Chart of the Day, we highlight a chart we have shown many times in the past which is the labor force participation rate. 


As the chart shows, the U.S. is literally at generational lows in terms of participation in the labor market.   In fact, labor force participation peaked at just under 67.5% in 2000 and has been in relatively steady decline ever since.  Currently, the labor force participation rate is just over 62.5% and at an almost 35-year low.


This emphasizes the oddity of the Federal Reserve using an arbitrary data point such as the jobless rate to highlight the health, or lack of health of the economy, since the jobless rate doesn’t take in to account the people simply dropping out of the labor force.  For today, we’ll leave a discussion of whether the Fed’s extreme dovishness has helped the economy to the side, but certainly the arbitrariness of their targets has and continues to confuse the markets. This is likely why the 10-year treasury rates are down almost 10% on the year and down again this morning. Simply put: investors don’t believe what the Fed is saying.


To add to the confusion, this morning Philadelphia Fed chief Charles Plosser is indicating he believes that Fed Fund rates will hit “2-something” by the end of 2015 and 3% by the end of 2016.  This is more than a 300 basis point move in the next couple of years.  Plosser also indicated he finds the market’s reaction to Yellen’s press conference last week confusing.  Well, Mr. Plosser, confusion breeds contempt, as they say.


Conversely, the United Kingdom, despite losing Scotland to Robert the Bruce many years ago, appears to have a central bank that is at a minimum providing some confidence to the markets and allocators of capital.   The U.K. reported CPI this morning at +1.7%, which suggests an inflationary environment in the U.K. that is relatively benign. 


Certainly, we’d be somewhat hypocritical if we assumed the CPI was the best gauge of inflation in the U.K. (it is a government constructed number after all), but nonetheless the key economic indicators in the U.K. continue to trend the right way as evidenced by CPI coming in lower versus the +1.9% reading in January. 


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.62-2.81%


VIX 13.34-17.42

USD 79.11-80.39

Gold 1 


Best of luck out there today and long live the king!


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Becoming King - Chart of the Day


Becoming King - Virtual Portfolio

LEISURE LETTER (03/25/2104)




  • CCL to report earnings pre-market, conf call at 10am EST ()

  • Las Vegas: 29th Annual Nightclub & Bar Convention Trade Show 40,000 delegates Las Vegas Convention Center

Wednesday, March 26

  • PENN at TAG Spring Consumer Conference
  • Melco Crown Extraordinary General Meeting
  • Melco Crown Board Meeting  

 Friday, March 28

  • Nevada gaming revenues release for February 



RCL -  Due to the oil spill and associated response efforts in the Port of Galveston, the March 23 Navigator of the Seas sailing has been canceled.  Guests will be refunded in full, will have the option to book a future cruise at a 25% discount, & may remain onboard until March 30.


TAKEAWAY:  Unfortunate cancellation for RCL but not material on an ongoing basis.


WYN -  The Art Deco New Yorker Hotel, located at Eighth Avenue and 34th Street, is undergoing a full makeover and transformation from the Ramada brand to the Wyndham Hotel & Resorts flag.  The property is owned by a subsidiary of the Unification Church.  Additionally, commercial space on the lower 18 floors is being converted into 172 additional hotel rooms. The hotel currently holds 912 rooms, and when all of the changes are complete, that number could jump to 1,500. As leases expire over the next five years, 270,000-square-feet of space will be freed up and turned into guest rooms.  The property is located two blocks from the Related Companies Hudson Yards project


TAKEAWAY:  NYC already having trouble absorbing above industry supply growth.


Saipan – We highlighted the Saipan Casino Legislation in our March 3rd Leisure Letter. The gaming legislation was signed into law by Governor Eloy Inos. The law allows a 40-year exclusive Saipan casino license - Inclusive of an initial 25-year period and an extension of 15 years - and a second option to renew for another 40 years for a total of 80 years.  The legislation requires the exclusive Saipan casino license holder to build from the ground up a hotel with at least “2,000 rooms,” but also does not set a timeline nor specify a phased-in approach. (Side note: currently the largest Saipan hotels currently have just over 400 rooms.)  The bill specifies that the $1 million in nonrefundable application fee and the $30 million in advance license fee payment shall be paid within 15 days of the law’s signing.  However, the casino legislation also gives the exclusive gaming licensee a rebate offset amount of 100 percent of the gross gaming revenue.


TAKEAWAY:  With current annual visitation of approximately 450,000 (comprised of 40% from Japan and 20% from China), that's only a small percentage of the total 730,000 room nights at a 2,000 room hotel. We remain skeptical of the casinos profitability and viability given the isolated location.  Additional airlift is required to ensure casino visitation. 




Hedgeye remains negative on consumer spending and believes in more inflation.  Following  a great call on rising housing prices, the Hedgeye Macro/Financials team is turning decidedly less positive. 


TAKEAWAY:  We’ve found housing prices to be the single most significant factor in driving gaming revenues over the past 20 years in virtually all gaming markets across the US.

Retail Callouts (3/25): UA/NKE, AEO, WMT, WWW, KATE, LUX, JCP, SHOO

Takeaway: Big ex NKE hire for UA. AEO did what? WMT squeezes prices even more. WWW/KATE Keds Round 2. LUX/GOOG Glass deal. Ullman pay hike.




  • FRAN - Earnings Call: Wednesday 3/26, 8:30am
  • PVH - Earnings Call: Wednesday 3/26, 9:00am



  • HMB - Earnings Call: Thursday 3/27, 9:00am
  • LULU - Earnings Call: Thursday 3/27, 9:00am
  • RH - Earnings Call: Thursday 3/27, 5:00pm


  • FINL - Earnings Call: Friday 3/28, 8:30am




ICSC - Chain Store Sales Index


Still lackluster sales growth as measured by the ICSC sales index, but the 1.7% growth rate is ahead of a) the 1.5% rate we saw last week, and b) last year's 1.0%. Compares remain relatively easy (starting this week) through May.


Retail Callouts (3/25): UA/NKE, AEO, WMT, WWW, KATE, LUX, JCP, SHOO - chart3 3 25




JCP - Mike Ullman Set for Big Pay Increase



  • Ullman...earned $2.4 million after his return to Penney’s as ceo in April. The sum included $811,000 for the prorated portion of his $1 million in annual salary and other compensation of $1.6 million, including $913,000 in personal use of corporate aircraft, making that perk larger than his collective paychecks, according to the definitive proxy filed with the Securities and Exchange Commission.
  • "Ullman’s base salary has been raised to $1.5 million and, after forgoing eligibility for stock and option rewards and a cash bonus in 2013 as the company faced a rapid cash burn and an uphill battle to turn itself around, this year he will be eligible for a cash bonus of up to twice his salary and equity awards of up to $5.5 million, making his potential pay package $10 million."


Takeaway: We're leading the charge that Ullman should no longer be at JCP. But let's be fair, he probably deserves some financial recognition for how much he's helped the company since his return. We have no problem with his higher comp package -- though we wish it was contingent on him not spending any time as Chair of the Dallas Federal Reserve or on the Board of the National Retail Federation.


WWW, KATE - our new keds are here! let’s…


Retail Callouts (3/25): UA/NKE, AEO, WMT, WWW, KATE, LUX, JCP, SHOO - chart1 3 25


Takeaway: This is a far bigger deal for WWW/Keds than it is for KATE. Keep in mind that Keds used to be a $500mm brand in the US alone. Now it is down to about $110mm (it was at $80mm when Payless owned it). There is massive runway here. 


WMT - Wal-Mart's new tool gives competitors prices



  • "Wal-Mart told The Associated Press that it has rolled out an online tool that compares its prices on 80,000 food and household products...with those of its competitors. If a lower price is found elsewhere, the discounter will refund the difference to shoppers in the form a store credit."
  • "The world’s largest retailer began offering the feature, called ‘Savings Catcher,’ on its website late last month in seven big markets that include Dallas, San Diego and Atlanta. The tool compares advertised prices at retailers with physical stores, and not at online rivals like that also offer low prices on staples."


Takeaway: This is a pretty savvy move by WMT. On one hand it will give customers the perception that they will always get the lowest price at Wal-Mart -- and yes, there are a lot of consumers that are completely comfortable going home after a shopping trip and entering UPC codes into their computer hoping to get some WMT bucks in the mail. But on the flip side, so many consumer goods are made specifically for retailers in different quantities sizes and shapes to avoid this kind of price discounting. In other words, you probably can't find the same exact package of Huggies at Target than you can find at Wal-Mart. Therefore the discount mechanism WMT is preaching won't apply. If there's any category it will work it is with thinks like Soda and canned goods. Though there's already great price transparency there.


UA - Under Armour Hires Fritz Taylor as VP, Run 



  • "Under Armour announced that Fritz Taylor has joined the organization’s footwear leadership team as vice president, run, effective immediately.  In this position, Taylor will be directly responsible for guiding the merchandising and development of all running footwear, including men’s, women’s and youth offerings."
  • "Prior to joining Under Armour, Mr. Taylor served in multiple management roles at Mizuno as Vice President and General Manager of Running, leading all aspects of their domestic running business. He also held a similar post as Senior Vice President, Footwear at Brooks, where he oversaw the design, development, merchandising and future concepts teams. Prior to Brooks, Taylor spent 19 years at Nike in various roles, including Product Director for Footwear and Category Footwear Leader for Running."


Takeaway: You don't last 19 years at Nike by being mediocre. This was a great hire by UA.  Having an office in Portland is starting to pay dividends for UA.


LUX - Google Inks Glass Deal With Luxottica



  • "Google...said it will partner with eyewear firm Luxottica as Google readies for the consumer launch of its Glass product later this year. Financial terms of the new deal were not revealed, and it applies only to the U.S."
  • "According to Google, it will work with Luxottica on the design of all glass-compatible frames...Google revealed the first in-house designed frames for Glass in January. Sunglass styles retail for $150 and optical styles are priced a bit higher at $225."


Takeaway: This one was inevitable. Luxoticca is to sunglasses what Fossil is to watches -- no one else can execute on mass design and production of a fashionable version of Google Glass than Luxotica.


AEO - American Eagle Is Going to the Dogs for Charity



  • "The line, which also has a charitable element benefiting the American Society for the Prevention of Cruelty to Animals, will be ready for stores for spring 2014."
  • "The collection can be previewed at, and currently feature denim to tees to swim products. Consumers  can sign up for a waitlist and then receive 20 percent off American Eagle purchases, with $1.00 per order benefiting the ASPCA. American Eagle said it aims to donate up to $100,000 towards the cause."
  • "Preston Konrad, American Eagle's style director, said, 'Your dog's style is another form of expressing your own, and we are thrilled to bring American Eagle fashionable looks to our pups with the debut of American Beagle Outfitters.'"  


Retail Callouts (3/25): UA/NKE, AEO, WMT, WWW, KATE, LUX, JCP, SHOO - chart2 3 25


Takeaway: First Ralph Lauren holds a fashion show for dogs, and now this? Seriously…can't these companies focus on selling apparel to humans?


SHOO - Steven Madden Teams to Buy Brian Atwood



  • "Atwood and Steven Madden Ltd. have acquired the Brian Atwood intellectual property and related assets in a series of transactions involving Bluestar Alliance LLC and The Jones Group Inc.for an undisclosed amount."
  • "The IP assets acquired by Atwood and Madden cover both the Brian Atwood and B Brian Atwood brands under a new entity that will operate as a separate division of Steven Madden, with Atwood holding a minority stake, according to Edward R. Rosenfeld, chairman and chief executive officer of Steven Madden."


Takeaway:  Not sure of the price, so we can't say if it's a good deal. But price aside, this makes a ton of sense for SHOO. Atwood was one of JNY's most valuable properties, and helps Madden gain access to higher-end dress shoes for women.




WMT - Asda to axe around 200 jobs



  • "Asda is to cut around 200 jobs as it forges a new five-year plan to tackle increasing competition from rival supermarkets and discounters."
  • "Head office staff in Leeds and the Leicestershire market town of Lutterworth, where its clothing arm, George is based, were briefed on the plans on Monday."
  • "The moves were part of a package of recommendations put forward by consultancy firm McKinsey, which also included calls for a widening of product ranges."


PVH - Arvind Limited Joins Indian Joint Venture with PVH Corp. for Operation of Calvin Klein Businesses in India



  • "PVH Corp...announced that Arvind Brands and Retail Limited, a subsidiary of Arvind Limited, has replaced PVH’s prior joint venture partners in Premium Garments Wholesale Trading Private Limited, the licensee of the Calvin Klein trademarks in India. In connection with the transaction, Calvin Klein, Inc...entered into a new license with Premium Garments to distribute Calvin Klein Jeans apparel and accessories and Calvin Klein Underwear products in India."


PVH - Steve Shiffman to Succeed Tom Murry as Calvin Klein CEO



  • "Steve Shiffman, currently president and chief commercial officer of CKI, will become chief executive officer on July 1, succeeding Tom Murry, who has been at the fashion firm for 17 years. Murry will become executive chairman, serving in an advisory role until he retires on Jan. 31."
  • "Murry, 63, originally planned to change his role at CKI in mid-2016, but decided to accelerate the process by two years. He said he felt like the company would be in capable hands with Shiffman, with whom he has worked closely for the past seven years."




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.


  • While Mainland China visitation is the most important visitor segment and has been above expectations in 2014, Hong Kong visitors represents 23% of the total  (2nd largest) and declined for the 11th straight month.  

  • Year-to-date, total and Mainland visitation rose 8% and 14%, respectively, while HK visitation shrunk by 6%.

  • There is a rumor the dead-boat gaming cruises out of the ports in HK may be playing a role as they are particularly attractive for locals looking for a quick gambling trip without going through the Macau ferry and immigration congestion. 

  • One concern could be if China’s macro issues bleed into Mainland visitation to Macau, HK may not be there to pick up the slack. 


Life and Light

This note was originally published at 8am on March 11, 2014 for Hedgeye subscribers.

“The life and light of a nation are inseparable.”

-James A. Garfield


That’s the opening quote to a fantastic US #history book I cracked open this past weekend: Destiny of The RepublicA Tale of Madness, Medicine, and the Murder of a US President, by Candice Millard of Kansas City, Missouri.


After serving only 200 days as President of the United States (MAR-SEP of 1881), Garfield was shot by a whacko loser by the name of Charles Guiteau. Not unlike many of us, Garfield never thought of himself as part of a “class.” While he was raised poor, he empowered himself with the light of self-education. He was one of the smartest Presidents America has ever had.


Being “smart” isn’t a big differentiator in this profession. On paper, I don’t really know anyone who is dumb. But thinking that an un-elected-central-planning-bureau can smooth our economic lives and provide us with a pre-18th century enlightenment is. While hope is not a risk management process, that’s all I have left that America’s currency finds her footing.


Back to the Global Macro Grind


As I alluded to in yesterday’s Early Look, 1870-1913 was one of the best economic periods in American history for a reason. The US understood the value of owning what was becoming the world’s reserve currency. There was no Federal Reserve to devalue it.


Life and Light - 567


Fast forward 100 years, and we have ourselves quite a scene to observe in global macro markets every day. Places like Argentina (who had the same standard of living as the US in 1920), missed having Presidential periods of sustained real (inflation adjusted) economic growth like 1983-1989 (Reagan) and 1993-1999 (Clinton) where the value of America’s currency rose with interest rates.


Our Global Macro Theme of 1H13 of #StrongDollar + #RatesRising is gone now. And, on many levels, that’s just a sad thing. It provided for what George Gilder recently coined as “information surprise” in the US economy. It was the life and light that the current @FederalReserve isn’t allowed to understand.


In case you are thinking about moving to another country, here’s what’s headline news around the world this morning:


1. New Zealand’s Prime Minister, John Key, is calling for a new country flag to represent the “end of the colonial era”

2. Swedish Consumers are enjoying #StrongCurrency Tax Cuts (Consumer Prices, CPI, -0.2% y/y for FEB)

3. UK Industrial Production #GrowthAccelerating to +2.9% y/y as the British Pound tests fresh 3yr highs


In other words, there is plenty of life and light in this world. You just have to stop navel-gazing politically in the US and realize that countries are racing against America as she always has against them.


But why do these headlines matter? What do these countries currently have in common?


1. NEW ZEALAND’s #StrongCurrency Policy (the Kiwi) has generated some of the strongest real GDP growth rates in the non-EM world. Consumer Confidence (which tracks the strength of a country’s currency) is testing all-time highs.

2. SWEDEN, while still recovering from its loss to the Canadian hockey team in the Gold medal game @Sochi, continues to reap the rewards of having a currency that can’t be devalued by some Japanese bureaucrat

3. UNITED KINGDOM continues to remind all those who followed in the footsteps of a raging Keynesian policy to devalue the Pound that real-inflation-adjusted economic-growth in the UK has accelerated alongside the purchasing power of its people


Don’t worry, all is not yet lost. But the US stock market’s volume could be. At the all-time highs in the SP500, volume has been as dead as a doornail. In both monetary policy and in market interest (CNBC ratings at all-time lows), the US is starting to emulate Japan. The land of the rising sun and “forward rate guidance” (Japan) saw its stock market volume hit 5 month lows last night too.


What if the life and the light were to just leave? And I mean literally. What if enough of us get what’s going on to simply not show up as the last lemming to buy the all-time bubble high from someone else who doesn’t call the all-time high price bubbly? What if all there is left is the last short seller covering his shorts high after shorting the January lows?


What if?


If, if, then statements aren’t new to evolution. Neither were they new (yesterday) to a part of this world (Latin America) that has tried, tried, and tried again to devalue its currencies as the best path to political power and prosperity.


Argentina, Brazil, Chile (Equities) were all down -1.2-1.6% yesterday as hedge funds continue to race to get net longer of a US stock market they got way too short of only a month ago (-80,000 net short futures/options contracts in Index +E-mini).


Latin American Equities (MSCI Index) are down almost -10% YTD as its people deal with unsustainable debt levels, deficit spending, and failed Policies To Inflate their way out of it via currency devaluation. The purchasing power and currency of The People are inseparable.


Our immediate-term Global Macro Risk Ranges are now as follows (Top 12 Daily Trading Ranges is a separate subscription product):


SPX 1864-1891

Bovespa 44566-47451

USD 79.38-80.11

Pound 1.66-1.68

Brent 106.93-110.61

Gold 1321-1355


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Life and Light - Chart of the Day


Life and Light - Virtual Portfolio

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Early Look

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