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Retail Callouts (6/19): RH, TGT, APP, LULU

Takeaway: RH prices convertible notes, de-risks growth strategy. TGT CEO search. APP terminates Charney.






  • "Restoration Hardware Holdings, Inc. today announced the pricing of $300 million of 0% convertible senior notes due 2019 at a 35% conversion premium to today’s closing stock price of $85.99. Restoration Hardware also granted the initial purchasers of the notes a 13-day option to purchase up to an additional $50 million of the notes on the same terms and conditions, for a total potential offering size of up to $350 million. Additionally, the Company entered into convertible note hedge and warrant transactions in order to prevent dilution up to a 100% premium to today’s closing stock price. Under the terms of these transactions, the Company’s shareholders are not expected to experience dilution until the Company’s stock price is above approximately $172…"
  • "The immediate use of proceeds from the offering will be to pay the net cost of the convertible note hedge transactions and general corporate purposes, including repayment of all of the outstanding indebtedness under the Company’s credit facility. The sale of the notes to the initial purchasers is expected to settle on June 24, 2014, subject to customary closing conditions."


Takeaway: The punchline on this financing deal is that it de-risked the growth strategy, and took out one of the key bear arguments on this stock. If there’s any bad news, it’s that that there will be dilution at some point over the next few years – because we think that RH trades through $170.


TGT - Target Faces Difficult CEO Search



  • "Target is reportedly speaking to traditional retail leaders such as Roger Farah, former vice chairman of Ralph Lauren Corp.; Ken Hicks, chairman, president and ceo of Foot Locker Inc.; Matt Rubel, a senior adviser at TPG Capital; Sharen Jester Turney, president and ceo of Victoria’s Secret, and Sharon McCollam, cfo of Best Buy Co. Inc."
  • "Target’s short list also is said to include Rosalind Brewer, president and ceo of Sam’s Club; Glenn Murphy, chairman and ceo of Gap Inc., Angela Ahrendts, senior vice president of retail and online stores at Apple Inc., and Mindy Grossman, ceo of HSN Inc. But Ahrendts just joined Apple, so she’s unlikely to leave; Grossman is said not to be interested, and Murphy probably wouldn’t want to leave Gap Inc., still in the midst of a turnaround, to go to another turnaround situation."


Takeaway: Farah, Murphy, or an Amazon exec make the most sense to us. This company needs a ‘rock-star’ CEO who is properly incentivized to make big changes in the organization. It’ll be tough for the company to attract that type of candidate unless they know that they have both the capital and board’s authority to make the changes necessary to fix what’s broken. That likely won’t be a quick process. And, it won’ t be cheap.


APP - American Apparel Board Suspends Dov Charney as CEO and Declares Intent to Terminate Him for Cause; Names John Luttrell as Interim CEO



  • "The Board of Directors of American Apparel, Inc. today voted to replace Dov Charney as Chairman and notified him of its intent to terminate his employment as President and CEO for cause. It is expected that the termination will be effective following a 30-day cure period required under the terms of Mr. Charney's employment agreement."
  • "'We take no joy in this, but the Board felt it was the right thing to do,' Mr. Mayer said. 'Dov Charney created American Apparel, but the Company has grown much larger than any one individual and we are confident that its greatest days are still ahead.'"


Takeaway: While it comes as no surprise that Charney was pushed out due to issues with his personal conduct and poor judgment, we find it hard to believe that this had absolutely nothing to do with the company’s performance. If this was a $100 stock, or even a $10 stock, and probably even a $5 stock, the Board would tolerate a lot more than if it were trading at $0.64. The key takeaway from where we sit is that Charney owns 27% of this company and the board, acting in the best interest of its shareholders, made the decision to disconnect the founder from the company. One other situation comes to mind. Chip Wilson at LULU who also owns 27%.




MW, JOSB - Men's Wearhouse, Jos. A. Bank Merger Complete



  • "On the day of The Men’s Wearhouse Inc.’s annual meeting at the Fairmont Hotel here Wednesday morning, the company completed the long-awaited acquisition of its competitor, Jos. A. Bank Clothiers Inc."


AMZN - Amazon.com unveils the Fire Phone, its first smartphone



  • "Amazon.com has officially launched the Fire Phone, its first smartphone, after years of rumors.
  • Chief Executive Jeff Bezos took to the stage in Seattle shortly after 10:30 a.m. PDT to unveil the smartphone, which boasts a 4.7-inch screen, 13-megapixel rear-facing camera and five front-facing cameras."
  • "The smartphone costs $200 for a 32-gigabyte version and $300 for a 64GB version, both with a two-year contract -- a higher-than-expected price tag given Amazon's history of pricing its hardware relatively cheap. AT&T will be the exclusive carrier for the phone."


Client Talking Points


U.S. Dollar Down hard on the latest central plan (down another -0.5% this morning) and everything asset price inflation loves it (including a short squeeze in SPX); Oil up, Gold up – up, up, and up, in devalued Dollar terms.


Down 6 basis points in a straight line off the Fed’s “dovish” news; bonds (and anything that looks like a bond) up with Utilities leading the rally yesterday (XLU = +15.2% YTD); stay with energy inflation (XLE) + slow-growth #YieldChasing equity sector styles vs consumer discretionary (XLY) short.


10 handle again (it’s never held below 10, and never is a long time) and the immediate-term risk range for VIX is 10.14-12.15 now, so there’s no reason why this massive (-115,000) SPX Index + Emini net short position in futures and options contracts can’t capitulate (like it already is) to the upside.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


After being bullish on rates in 2013, we continue to be bearish on US rates in 2014



“Education is the most powerful weapon you can choose to change the world.”

-Nelson Mandela


U.S. share buybacks and dividend payments climbed to a record level in the first quarter of 2014, as companies chose to boost shareholder returns in the absence of robust revenue growth. (Financial Times)

ICI Fund Flow Survey - Bonds Are Running - Above Average Week for Fixed Income

Takeaway: Taxable bonds have just put up their 18 consecutive week of inflow assisted by tax-free inflows at 22 consecutive weeks.

Investment Company Institute Mutual Fund Data and ETF Money Flow:


In the most recent 5 day period, bond fund flows in both taxable and tax-free products had solid production producing inflows last week over the year-to-date running averages. This intermediate term trend for fixed income is highlighted by 18 consecutive weeks of inflow into taxable bonds assisted by 22 consecutive weeks of inflow into tax-free fixed income funds. Conversely, equity funds had another choppy week with domestic stock fund outflows, the 7th consecutive week, offset by international stock fund inflows.


Total equity mutual funds put up a modest inflow in the most recent 5 day period ending June 11th with $2.2 billion coming into the all stock category as reported by the Investment Company Institute. The composition of the $2.2 billion subscription continued to be weighted towards international equity funds with $3.7 billion coming into international stock funds which was offset by a $1.4 billion outflow in domestic products. This outflow within domestic equity funds has become an intermediate term trend with now the seventh consecutive week of outflow in the category. The aggregate subscription of $2.2 billion for the recent five day period was below the year-to-date average for equity funds of a $2.6 billion inflow, which is now running below the $3.0 billion weekly average inflow from 2013. 


Fixed income mutual fund flows had a solid week of production with the aggregate $2.3 billion that came into the asset class besting the 2014 running year-to-date average inflow of $2.0 billion. The inflow into taxable products of $1.8 billion was the 18th consecutive week of positive flow and the inflow into municipal or tax-free products of $527 million was the 22nd consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $2.0 billion weekly inflow, an improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow). 


ETFs had a mixed showing versus mutual funds last week with equity ETFs putting up a strong week of production offset by weak passive bond flows. Equity ETFs experienced a robust $8.6 billion inflow, while fixed income ETFs put up a meager $137 million subscription. The 2014 weekly averages are now a $1.1 billion weekly inflow for equity ETFs and a $1.2 billion weekly inflow for fixed income ETFs. 


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $8.3 billion spread for the week ($10.8 billion of total equity inflow versus the $2.4 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $6.9 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   


ICI Fund Flow Survey - Bonds Are Running - Above Average Week for Fixed Income - ICI chart1



Most Recent 12 Week Flow in Millions by Mutual Fund Product:


ICI Fund Flow Survey - Bonds Are Running - Above Average Week for Fixed Income - ICI chart2


ICI Fund Flow Survey - Bonds Are Running - Above Average Week for Fixed Income - ICI chart3


ICI Fund Flow Survey - Bonds Are Running - Above Average Week for Fixed Income - ICI chart4


ICI Fund Flow Survey - Bonds Are Running - Above Average Week for Fixed Income - ICI chart5


ICI Fund Flow Survey - Bonds Are Running - Above Average Week for Fixed Income - ICI chart6



Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:


ICI Fund Flow Survey - Bonds Are Running - Above Average Week for Fixed Income - ICI chart7


ICI Fund Flow Survey - Bonds Are Running - Above Average Week for Fixed Income - ICI chart8



Net Results:


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $8.3 billion spread for the week ($10.8 billion of total equity inflow versus the $2.4 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $6.9 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


ICI Fund Flow Survey - Bonds Are Running - Above Average Week for Fixed Income - ICI chart9 




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.

CHART OF THE DAY: The Truth About Real Wages

Takeaway: U.S. real-wages (what you get paid in terms of wage growth minus made-up gov't inflation) just went negative for the 1st time in 2 years.


CHART OF THE DAY: The Truth About Real Wages - RWG

Doves Kill

“And John bare record, saying, I saw the Spirit descending from heaven like a dove…”



God called Janet Yellen and told her to cut her US growth forecast and devalue the Dollar again yesterday. Thank goodness for that. What would we do without her?


Doves Kill - Titanic 03.31.2014


Back to the Global Macro Grind


As ridiculous as doing the same thing over and over and over again (and expecting a different economic outcome) sounds, the un-elected-economic-central-planning-authority did just that (again), targeting rates lower (and inflation higher), yesterday.


Not that anyone should hold them accountable to why, but here’s what the Fed did yesterday:


  1. Cut its 2014 US GDP Growth forecast from 3% to 2.1%-2.3%
  2. But kept its 2015 GDP Growth forecast at 3.0-3.2%


Ah, so doing more of what is slowing real-inflation-adjusted growth is the answer, eh? Cool. Maybe if you’re long slow-growth #YieldChasing assets like bonds (or anything that looks like a bond – Utilities (XLU) led the rally yesterday, closing at fresh new highs of +15.2% YTD).


If you’re the poor bastard living on $60,000 US or less (i.e. the median consumer in America)… Well, you can eat the all-time highs in cost of living, and like it. Because these doves are going to kill your real-wages.


As you can see in the Chart of The Day, before the Oil spike in June (this is a May number), American real-wages (what you get paid in terms of wage growth minus made-up government inflation) just went negative for the 1st time in 2 years. That’s gotta be good.


BREAKING: Fed Fueled Stocks Fly, Dollar Sags, Oil 9 Month Highs” –Reuters


That’s a pretty cool headline too, right? Notwithstanding that US Consumer Discretionary (XLY) stocks are still DOWN year-to-date and Energy (XLE) +12.6% and Utilities are leading the rally, who cares about the details.


In other news, divine intervention took the VIX back to 10 yesterday. As a friendly reminder:


  1. The VIX (US stock market fear index) has never (ever) held below 10 in US history
  2. Never, ever, is a very long time


“So”, with bond yields falling fast (again) and Gold rising (again), what do I think you should do now?


  1. Keep doing the same thing we have been saying all year (buy #InflationAccelerating and slow-growth #YieldChasing assets)
  2. And add more frequent prayer to your daily process on days that the VIX has a 10 handle


Even if you’re not religious, I think you should think outside the box here and just do it. Because this is not going to end well.


As opposed to making a backward looking call that the US is going to repeat the prior credit crisis, I think the next economic crisis is going to be perpetuated by Fed policy. These ideological doves are going to kill 70% of US GDP (consumption) with a Policy To Inflate.


Our immediate-term Global Macro Risk Ranges are now (with intermediate-term @Hedgeye TREND signal in brackets):


UST 10yr Yield 2.46-2.64% (bearish)

SPX 1 (bullish)

RUT 1155-1185 (neutral)

VIX 10.14-12.15 (bearish)

USD 80.07-80.63 (bearish)

EUR/USD 1.35-1.36 (bullish)

Pound 1.68-1.70 (bullish)

WTI Oil 105.14-108.28 (bullish)
Gold 1 (bullish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Doves Kill - RWG

LEISURE LETTER (06/19/2014)

Tickers: LVS


  • Thur June 19: Todd in Macau for meetings
  • Thurs June 19:  Hedgeye Cruise survey (pre-CCL F2Q)
  • Thurs June 19: LA May revs released
  • Thurs June 19-20:  2014 Asia Cruise Forum (Taiwan)
  • Tuesday June 24:  CCL F2Q CC


LVS / 1928:HK - Sands Cotai Central announced a retail expansion with the addition of 150,000 square feet (13,935 square metres) called Shoppes at Cotai Central, the third phase of the shopping mall, which will bring the total number of stores to 140 and increases the size of the mall in operation by 70%.

Takeaway:  Adelson has repeatedly said the Company would only consider selling the retail assets when the growth has matured - which is clearly not the case.  Upside to retail revenues at SCC.


Macau VIP Junkets(Macau Business) Daiwa Securities believes some small VIP gaming promoters have stopped operating and that some medium-size promoters have reduced their operations and attributes this slowdown to insufficient liquidity and inability to meet minimum rolling chip turnover guarantees. 

Takeaway:  We heard annedotal commentary of a slowdown in "casual" junket more than four weeks ago. 


Macau Competition(GGR Asia) Australia-listed Donaco International Ltd says the newly opened Aristo International casino hotel in Vietnam is drawing strong interest from high rollers and junket operators from mainland China. The property had its soft opening on May 18 and is Donaco’s only gaming operation. The property is located in the northern province of Lao Cai, bordering China’s Yunnan province. The casino can have up to 50 gaming tables and most of those will be allocated for baccarat, the company previously said. Aristo’s VIP players check in a minimum of RMB600,000 (US$96,287), with a minimum bet size of RMB3,000, according to Donaco’s data.

Takeaway: A small threat to Macau and Singapore.


Malaysia – expects dip in Chinese tourists, eyes more visitors from Singapore (Strait Times) 

The Malaysian government hopes to make up for an expected dip in visitors from China by getting more Singaporeans to go for holidays across the Causeway.  Malaysia's Minister for Tourism and Culture, Datuk Seri Nazri Aziz, said that more than 60 flights from China to Malaysia have been cancelled because of poor take-up rates from Chinese travellers since March when Beijing-bound Malaysia Airlines Flight MH370 disappeared.

Takeaway: LVS/Genting have downplayed the Malaysian impact but we are concerned about the decline in visitors to Singapore.


Japan Gaming Legislation – Japanese legislators discussed the idea of an entry levy on all gamblers including foreigners as well as locals were casinos to be legalized in Japan.

Takeaway: An entry fee on foreigners would be a departure from the Singapore and Macau models and a deterrent to promoting visitation.


Singapore Pawn Shops(MDT) Pawnbrokers are proliferating across Singapore as gamblers seeking short-term loans add to demand for quick cash from people struggling to make ends meet in the world’s most expensive city. The number of pawnshops across Singapore increased to 214 in 2014, up from 114 in 2008, according to a report by DMG & Partners Securities Pte. Loans disbursed by the industry jumped to S$5.5 billion (USD4.4 billion) in 2013 from S$1.6 billion in 2007, according government data show.

Takeaway:  We expect more negative headlines around this issue as such data will not likely be received well by the Singapore government.


Rhode Island Gaming – The Rhode Island House of Representatives pass a bill allowing Twin River’s casino the ability to offer up to $50,000 in credit to gamblers.  However, the legislation will not go to conference committee to reconcile the differences as compared to the Senate legislation.

Takeaway: The state is likely trying to remain competitive against an every increasingly competitive landscape with the expansion of gaming in neighboring states. 


Taiwan Cruise – (Taiwan Today, Seatrade Insider)  "It is projected that next year, no less than 350 cruise ships will include local ports in their itineraries, bringing 1 million tourists and NT$7 billion [US$233.3 million] in revenue,” a TIPC official said on the sidelines of the Asia Cruise Forum in Kaohsiung City.  Taiwan is strategically located along popular cruising routes in the Asia Pacific – from Japan along the Western rim to Singapore and the Straits of Malacca.  

Takeaway: Another Asian market to keep an eye on


Chinese Debt(China Daily) Total Chinese debt according to Standard Chartered is 142T yuan ($22.7T) - or 245% of GDP - as of the end of March, is up from 133T yuan, or 233% of GDP, at the end of 2013. However, Standard Charted pointed out that debt expansion slowed to 18% y/y during Q1, compared with 24% in the same period of 2013. The article noted that the buildup in debt is leading to mounting repayment pressures. The bank estimates that interest payments were equivalent to 13% of GDP in March, up from an average of 7-8% in recent years.


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.

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