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Keith McCullough Sees Ratings `Incompetence' on CDOs


It was reported today that the January Case-Shiller home price index rose +0.3% month-to-month (8th consecutive month of improvement), and declined only -0.7% year-over-year from -3.1% last month; this is the slowest rate of decline in 36 months.


January saw month-to-month price declines in the following cities: Miami (-0.1%), Atlanta (-0.5%), Chicago (-0.8%), Charlotte (-0.1%), New York (-0.3%), Portland (-0.5%), Dallas (-0.3%) and Seattle (-0.6%).   In contrast prices improved in Los Angeles (+1.8%), San Diego (+0.9%), San Francisco (+0.6%), and Phoenix (+0.8%).


We do not expect this trend to continue as we head into 2H10.  Despite continued efforts on the part of the Obama administration to provide relief to the housing sector, there are several reasons for a more cautious stance.  (1) Interest rates (especially mortgage rates) are headed higher, (2) housing starts and existing home sales continue to be at extremely low levels, (3) there is a recent uptick in the percentage of existing home sales sold in foreclosure and (4) home prices will remain depressed as the rate of foreclosed homes increases (adding to inventory of unsold homes).


As a point of reference, the S&P 500 Homebuilding index is up 24% in the past three months and 4.5% over the past week.  Over the same time period, the S&P 500 is up 4.2% and 0.6%, respectively.   


In the short run, home builders can protect their earnings stream against a stagnating housing market by (1) focusing on selling homes where there are less distressed properties, (2) cutting administrative costs and (3) reducing incentives to buyers.  The disconnect between the housing market and homebuilding stocks is what we call a duration mismatch.


Howard Penney

Managing Director




SP500 Levels Update: "The World Is Awash With Liqudity"

In the last 2 weeks, I have largely missed these short squeeze rallies to higher-highs in the SP500. I missed making money on them in last part of 2007 too. This time, the volume is a lot lower (both actual market volume and the daily yip-yap of who is going to be LBO’d next), but things I am seeing and hearing out there are starting to rhyme.


I won’t remind you who those were that used to parrot that “the world is awash with liquidity” in 2007, but I will show you a chart that A) isn’t new and B) gets emailed to me at this point every other day. This is one way the perpetual bulls are trying to justify chasing this rally up here  - the “cash on the sidelines.” Yes, there is a lot of it. But there was with the SP500 -74% lower too.


The second chart shows you the Pain Trade since the February 8th lows. By any historical analysis of SP500 price performance, a +11.2% melt-up in over a 7-week timeline is not normal. Some people are calling this a complacency rally. I disagree  - I think it’s a Fear Rally at this point. There is outright fear of either being short squeezed or redeemed for missing another massive move higher. This fear factor is usually most prominent at month and quarter ends (Wednesday).


Anything north of the 1175-1178 range in the SP500 would be a 2.5 standard deviation move in my model. These don’t happen very often on the duration I am using (immediate term TRADE). We could easily see an early month correction in April like we did in February. The intermediate term TREND line of support for the SP500 is at 1118. From today’s price, that would be a -5% correction that my models wouldn’t consider anything but proactively predictable.


I’m not calling for a 2008 style crash, yet. But I am calling for another correction.



Keith R. McCullough
Chief Executive Officer


SP500 Levels Update: "The World Is Awash With Liqudity" - S P Cash Index


SP500 Levels Update: "The World Is Awash With Liqudity" - S P

Early Look

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R3: OXM/CHRS, and the Market’s Broad Brush



March 30, 2010



TODAY’S CALL OUT: OXM/CHRS, and the Market’s Broad Brush


OXM and CHRS each reported polar opposite quarters – but weakish guidance is all it takes to take away the bid on these names. OXM is showing an improving sales trajectory, and a far better balance sheet relative to sales. CHRS can’t get out of its own way, with higher margins, but one of the biggest sequential negative changes in inventory/sales in retail this quarter. Higher margins with inventories building? Good luck.  Despite the very different SIGMA positions below (let me know if you need interpretation), the stock movements are not too dissimilar this morning. We’re at the point where all it takes is a hint that beating estimates/guidance is no longer a reality – and buyers evaporate.


R3: OXM/CHRS, and the Market’s Broad Brush - OXM SIGMA


R3: OXM/CHRS, and the Market’s Broad Brush - CHRS SIGMA 





  • As Apple iPad launch day approaches (April 3rd), the big question is where can consumers go to find the latest super hyped gadget.  Interestingly, while all Apple stores will have the product on day one, not all Best Buy’s will carry it.  Best Buy will only stock the iPad at locations that are staffed with Apple Solutions Consultants.  Apple.com will also be the only online retailer to carry the device at launch.


  • According to research firm compete, the average American holds 4.4 credit cards but regularly only uses about 1.9 of those cards.  Interestingly, 36% of cardholders base usage on specific deals offered such as reward points or specific merchant savings.   Another 18% of cardholders actually have no particular reason for choosing one card vs. another. We note this is all in light of another recent study that revealed 54% of consumers actually prefer to use cold hard cash for purchases.


  • ‘Exploding’ gift cards are quickly becoming a thing of the past. With most national retailers forced to eliminate expiration dates and dormancy fees on gift cards to comply with restrictions adopted by 40 states, the Fed has ruled that retailers have until August 22, 2010 to remove all such cards from the shelves. The new rules will require that dormancy fees start no less than 1-year after the issue date and expirations no sooner than 5-years. More importantly, related details will be detailed on cards after this summer. The real change is likely to temper the typical post holiday rush a time when consumers have felt compelled to cash their cards in before realizing they’ve expired worthless.




R3: OXM/CHRS, and the Market’s Broad Brush - Calendar





SGMA Sport Participation Report - According to the Sporting Goods Manufacturers Association's Sports, Fitness, and Recreation Participation Overview (2010 edition), baseball, football and basketball all continued to show notable declines in participants in 2009. Outdoor soccer and outdoor softball saw smaller declines. But notable gains were seen in lacrosse, rugby and ice hockey. <sportsonesource.com>


UA Dips into Tennis - Under Armour has signed into an agreement with the Junior Tennis Champion Center at College Park, Maryland. The company will supply gear to the centers' coaches and instructors who will wear and test new products. <sportsonesource.com>


High End European Outlet Mall Operator Sees Increases - Value Retail plc, which operates nine high-end outlet malls in Europe with a total of 850 stores, reported a 21% increase in sales in 2009, reaching the 1 billion euro-mark, or $1.39 billion at average exchange rates. The number of visitors rose 11% last year. In particular, the number of shoppers hailing from China grew 80%. Visitors from the Middle East jumped 122% and those from South East Asia climbed 67%. <wwd.com/business-news>


Positive Outlook on Italy's Textile and Apparel Industry - Italy’s textile and apparel industry has overcome “the most dramatic phase of the current recession,” according to Sistema Moda Italia, one of the country’s main fashion associations. In 2009, the textile and clothing industry registered revenues of $62.8 bn at average exchange rates, down 16.5% compared with the previous year. Exports fell 20.3%, while the value of production slipped 13.8%. <wwd.com/business-news>


WalMart Welcomes Latino Apparel Brands - Chucho and Palomita, new young men's and juniors' Latino clothing brands, have rolled out at select Walmart stores across Arizona, California and Texas. Both brands are manufactured by DLI and are distributed by West Coast Novelty. WCN also has relationships with NFL, NBA and MLB.

In other Walmart news, the retailer plans to begin selling 3-D televisions leading up to the holiday shopping season. Other retailers such as Best Buy, Sears and Amazon.com have already begun carrying 3-D TVs. <licensemag.com>


Japanese Retail Sales Rise on Government Subsidies for Green Cars - Japanese retail sales rose 4.2% higher in February from a year earlier, according to government data released Monday. The result far exceeded the 1.8% average forecast from a Reuters survey, and was the largest gain since a 12.4% spike in March 1997, according to Dow Jones Newswires. Part of the rise was attributed to government subsidies for fuel-efficient cars. <marketwatch.com>


JOEZ Signs Footwear License Agreement - Joe's Jeans Inc. announced today that it has signed a new license agreement with Burano LLC to manufacture and distribute Joe's® branded footwear for women. The initial term of the agreement is for three years with minimum net sales commitments of $5.5 mm over the term. The first shipment consists of ballet flats in a variety of embellishments and textures and began shipping this month to major department and specialty store retailers, Company owned retail stores and its Internet store with a retail price of $120 to $145. In April, a line of wedges, flat sandals and casual heels is expected to begin shipping and the Fall line, including boots, is expected to begin shipping in July. <money.cnn.com/news>


Haiti Hopes To Increase Textile Production Volume - The Haitian apparel industry has asked the Obama administration and Congress to increase the volume of textiles and apparel that can be shipped here duty free in an effort to help its domestic industry get back on its feet following the devastating earthquake in January. The higher duty free levels are necessary to encourage significant investments in Haiti’s garment sector, which suffered significant hardships from earthquake damage, said Georges Sassine, president of the Association of Industries of Haiti and executive director of the CTMO-HOPE, a government-sponsored commission. <wwd.com/business-news>


Hugo Boss Cuts Dividend - The supervisory and executive boards of Hugo Boss AG have proposed a 30% cut in the firm’s dividend for 2009. Shareholders are to receive 0.96 and 0.97 euros, or $1.29 and $1.30 at current exchange rates, per common and preferred shares, respectively, down from 1.37 and 1.38 euros, or $1.84 and $1.85. The company said Monday that the lowered dividend would ensure “sufficient financial resources for future growth.” <wwd.com/business-news>



Following BYI's lead with its own service window is probably an incremental positive.



"This new solution helps preserve operator investments. Now operators will have access to future technologies on the gaming machines they have today. And, because this solution is GSA-compliant, it gives operators more control and flexibility for the types of content distributed across the network - creating a better player experience,"

- Rich Schneider, executive vice president of gaming products.



After market close yesterday, IGT announced that its new Service Window (SW) solution for legacy IGT 80960 video machines will now be available for AVP and MLD machines.  Since no additional hardware is required, the margin on SW should be over 90%, and if pricing is similar to BYI’s iView, each Service Window software package could sell for $1,500.  IGT spoke about launching a Service Window that is compatible with legacy machines during G2E, so this isn’t exactly a surprise, but it is a positive.  BYI maintains over 100,000 iViews installed across casinos that run off BYI’s systems and has been a nice revenue driver for them.  Moreover, as applications continue to be developed for iVIEW, it could become a large driver of recurring revenues. iSpin is an example of an application that will run off an iVIEW, that can generate incremental revenues for BYI's. 


IGT’s SW solution for legacy games has some large differences from BYI’s iVIEW – namely, IGT’s Service Window can only go on an IGT machine, while BYI’s iVIEW can go onto any device.  Additionally, since the Service Window isn’t a hardware solution, it can only be installed on video slots, while BYI’s solution can be installed onto any device on the floor. Functionally, the Service Window, SB Window, iVIEW and iVIEW DM all do the same thing.


This is IGT’s second announcement of supporting legacy platform, a smart moves in the current environment.  Operators continue to be hesitant in deploying capital.  IGT has the largest legacy floor share and hence the most share to lose as machines get replaced.  This is a new IGT from the one of a few years ago that rolled out an unsuccessful strategy of forcing a replacement cycle with its technology.

Dublin Down

“All sins cast long shadows.”

-Irish Proverb


After expedited +11% and +17% rallies in the S&P500 and Greek Athex Composite, respectively, since their February 8th YTD lows, what have we learned? In the short term, we have learned that government bailouts continue to be bullish for stocks.


In the intermediate term, in looking at the US bailout exercise on its own, it’s pretty easy to argue that bailouts have been bullish for stocks as well. After closing just 1 point shy of its intermediate term cycle-high last night, the S&P500 is +73.5% since its March 9th low. This huge rally looks a lot like Japan’s initially did in the early 90’s.


In the long term, the sins associated with extending your off-balance-sheet liabilities (like the US is doing with GSE debt), remains a major concern for any analyst who considers sovereign debt for what it is. Those rightly placed long term balance sheet fears are probably perpetuating the last leg of this generational short squeeze of the short selling community. Some people just cannot reconcile why we are going higher.


We call this Duration Mismatch. Currently that’s what you are seeing develop between what people think is moral and “right” versus what will help you get the stocks right. These are two very different things. At Hedgeye, we try to capture the short term developments within the construct of what we call TRADEs (like Citigroup going from $2 to $4), but all the while try to maintain the sobriety of the long term TAILs (can the Pandit Bandit take Citi from $4 to $16?).


After making plenty of mistakes short selling things over the years, I’ve developed this language in an effort to build an investment research process that’s duration agnostic. Global markets and the information that feeds them are becoming more interconnected by the day. I don’t see any other way to adapt to such a dynamic ecosystem, yet.


In order to bring this investment point to a practical place, let’s consider the Duration Mismatch associated with the stock market in Ireland (all prices and dates for the Irish Overall Index):

  1. February 21, 2007 the market peaks (ahead of the US stock market) at 9968
  2. March 9, 2009 the market bottoms (same day as US stocks did) at 1916 (-80.8% crash from peak)
  3. September, 17, 2009 the global short squeeze of the Great Depressionistas gets you back to 3469 (a +81.1% return)
  4. February 15, 2010, the Irish eyes ain’t smilin’; stocks have dropped to 2862 (a -17.5% drop from the 9/09 peak)
  5. March 26, 2010, the fightin’ Irish are back after another squeeze from 2/15 of +12.2% (3212 on the Irish Overall)

Fun place for your retirement accounts or what? It’s called price volatility sponsored by a Bubble In Politics.


This Irish stock market story gets more interesting by the minute. In the last 48 hours, this country that the short sellers called a PIG in February has started to go down again. For the week-to-date, Irish stocks are flashing what we call a regional negative divergence (underperforming other countries in both the European region), and its doing so on very bad long term news.


The isn’t “new” news, per se, but everything has a price. Timing, when the long term TAIL of a “Bad Bank” plan (taking over toxic loans from dysfunctional lenders) like Ireland has imposed on their citizenry can obviously wreak some havoc on your stock portfolio. If you don’t invest alongside government-leaked inside information, your best path forward in Ireland is to wake-up every morning and understand when they are going to double down again on government debt.


Dublin Down is maybe a cute way of saying what happened yesterday in the Irish banking stocks, but there is nothing cute about this, ladies. Dublin based Allied Irish bank was down -17% yesterday on fears that the unknown is known again. After receiving over 7 Billion Euros in government support, Allied Irish could need as much as another 7.7 Billion Euros ($10.4B dollars) and the Irish government to take as much as a 70% stake in the company…


If you want to wrap all of these massive price moves in Ireland’s stock market around your head and consider what could happen to US stocks from here (if indeed the Irish continue to be a lead indicator for global leverage disease coming back into focus), you might want to get yourself a pint.


Look on the bright side, the Greeks have only seen their sovereign debt in default (or restructuring) about 50% of the time since the year 1800 (see Reinhart & Rogoff, This Time is Different). So, compared to that, the Irish look great from a historical and a relative perspective. Bear in mind, the Irish didn't declare independence until 1916. So give these political lads some time.


Yesterday, the fibbing Greek government issued 5B Euros of 7-year debt yielding 6%. That’s 3.34% more than German bunds of the same duration. How’d ya like to have some o’ that paper in your 401k!


Piling Debt, Upon Debt, Upon Debt may indeed make the short to intermediate term pricing of equity look good. But, in the end, the sins associated with these debts will be casting long shadows.


My immediate term support and resistance lines for the SP500 are now 1167 and 1175, respectively. We re-shorted the Euro via the FXE etf on yesterday’s strength.


Best of luck out there today,



Dublin Down - Allied Irish Banks


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 80.51%
  • SHORT SIGNALS 78.32%