Europe’s Dead-Cat Bounce in Context

Position: Long Germany (EWG)


Today, European equities rallied off oversold levels (gaining +1.75%-4% across the region), however we’re interpreting the move as just that, a dead-cat bounce.  The headline risk associated with Europe’s sovereign debt contagion that has markets punishing countries with over-extended public debts and deficits is severe and should weigh to the downside over the next 3-5 years.


As we’ve shown in our research, despite the bailout package for Greece (May 2010) and the assurance of one in Ireland (Nov. 2010) credit spreads continue to widen as investors demand further protection to own the debt of Europe’s periphery and sell out of their positions as the Crisis in Confidence persists (see chart below).


Europe’s Dead-Cat Bounce in Context - m1


We don't believe recent statements from Eurocrats that speak to the contrary:


(12/1) Portugal’s PM Jose Socrates: “I do not see any reason to change the position of the Portuguese government which is very clear: we do not need any help…”


(12/1) Deutsche Bank’s CEO Josef Ackermann: “Investors’ mistrust of Spain is unjustified and the problems in the banking industry are manageable.”


Also, a quick look at select equity markets of debt and deficit bloated countries shows just how severe the recent run (inclusive of today’s bounce) has been. Here is the performance since the weekend of November 20-21 when Ireland confirmed its “need” for a €85 Billion bailout from the EU/IMF:  Italy’s MIB FTSE -6.0%; Portugal’s PSI 20 -5%; Ireland’s ISEQ -4%; Spain’s IBEX -4.0%.


The Euro has also corrected severely against major currencies, including versus the USD, down -4% since 11/19.  Our immediate term TRADE range for the EUR-USD is $1.29-$1.33.


As the PIIGS remain mired in the muck, we continue to like Germany due to its fiscal conservatism and profitable industrial and exporting base.  As the chart below shows, its unemployment rate has steadily declined over the last year to 7.5%, far outpacing the Eurozone average that ticked up 10bps to 10.1% in the most recent month and the scary base levels of 20.7% in Spain or 13.5% in Ireland. Further, German companies continue to outpace their peers, finding strong demand at home and abroad (especially China).


Europe’s Dead-Cat Bounce in Context - m2


German Retail Sales reported today gained a healthy +2.3% in October month-over-month. 


Finally, Manufacturing PMI figures were released for 15 European countries today. As the chart below shows, 10 countries saw an improvement while 5 contracted month-over-month. The notable call-out here is Italy, which contracted to the downside and teeters above the 50 line that divides expansion (above 50) and contraction (below 50). For more on our bearish bias on Italy see our portal.


Europe’s Dead-Cat Bounce in Context - m3


We’ll be looking to tactically short European countries with sovereign debt risk in the Hedgeye Portfolio.  Stay tuned.


Matthew Hedrick



Sports Apparel Came in Strong

Athletic Apparel sales came in +31% due in the week ending Sunday per Sportscan POS data. This is due in part to the most favorable compare of the year, but even adjusting for that, sales were still robust.  Sales improved across all channels, and higher sequential ASPs also suggests that sales were not driven by accelerated promotional activity.

Another key callout is regional performance – particularly the strength in the Pacific region up +30% which posted its third straight week of double-digit growth outperforming all other regions on the week. In addition, the regions’ stability through October is noteworthy relative to the rest of the country and particularly as it relates to Collective Brands reporting after the close given this region has been highlighted as an underperformer for the domestic business of late.


Details on specific company callouts to follow.


Sports Apparel Came in Strong - App sales table 12 1 10


Sports Apparel Came in Strong - App Region chrt 12 1 10


Casey Flavin


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R3: DECK, TBL, Fila, MTB Bill


December 1, 2010





  • In the aftermath of Black Friday, one statistic reported that some 7,000 people lined up at 4 a.m. outside of Macy's Herald Square flagship this year compared to 5,000 last year. Consistent with one of the key trends over the weekend was that men seemed to make up a considerable portion of the incremental buyer base.
  • In an effort to raise money for World AIDS Day (today), several celebrity Tweeters including Kim Kardashian, Justin Timberlake, Alicia Keys, and Lady Gaga are embracing the concept that a statement of silence can in fact be louder than words by temporarily quitting twitter for the day. The celebs will begin tweeting again once they've raised $1mm in donations. Fortunately for Skechers, Kim’s recent endorsement deal isn’t effective until January at which point we expect the star starts pumping/tweeting toning product to her 5.5 million followers.
  • While the majority of retailers offered various promotional deals to entice shoppers on Black Friday -- even if not visible in the form of front window displays, Lululemon was one of the few that did not. Instead, the leading yoga-apparel retailer offered a Black Friday Boot Camp at select locations, which didn’t appear to visibly slow traffic relative to its promotional peers.
  • In perhaps what could be viewed as another sign of increased online traffic over the weekend, JCP's e-commerce site crashed for more than 2-hours on Friday due to visitor traffic. More importantly, the retailer's site was up and running in time to capture Cyber Monday shoppers that hit sites in droves though it doesn't help the company's standing as #16 on Internet Retailers annual list.  Then again, its e-commerce effort might just flat-out stink.



Ugg Signs Tom Brady - Ugg Australia is going for the men’s vote. The boot brand has tapped three-time Super Bowl champion Tom Brady for its first men’s marketing campaign. Under the multi-year deal, the New England Patriots quarterback will be featured in a global marketing campaign, starting in fall ’11. Brady also will consult on products for fall and future collections. The Ugg brand, owned by Deckers Outdoor Corp., already includes a men’s offering with a full line of cold-weather and casual shoes, boots, slippers, outerwear and accessories. Success in the women’s category, however, has helped the brand achieve $800 million in predicted sales for 2010. <WWD>

Hedgeye Retail’s Take: In the past month alone, Brady has signed with an athletic brand (UA) and a casual/lifestyle brand (DECK). Is a fashion brand endorsement pending, or will Brady let his better half represent the household there? Either way, it synchs with our view that the strong Athletic R&D Cycle is also manifesting itself in expensive endorsements. Ultimately who wins? FL, FINL, DKS, HIBB, etc…


New TBL Hire - The Timberland Co. appointed Anne Cavassa as senior director of North America merchandising. Prior to joining Timberland, Cavassa was a consultant at Ibex Outdoor Clothing where she was responsible for guiding the company in transition from wholesaler to multi-channel retailer.  Previous to Ibex, she was general manager at Nike and launched Nike's new retail concept in the U.S. Preceding Nike, Anne was with Eastern Mountain Sports where she was the director of merchandising responsible for leading strategic product shifts across apparel, outerwear, footwear and hard-goods. Before Eastern Mountain Sports, she had appointments with Reebok International Ltd., Tommy Bahama and Eddie Bauer that encompassed product line management as well as design and development. <SportsOneSource>

Hedgeye Retail’s Take: Worthy of calling out for two opposing reasons, 1) Cavassa comes from one the premier domestic wool-based brands and Smartwool’s biggest competitors (future M&A candidate?). But on the flip side, 2) her experience was at Nike Retail (while it was not profitable). She also had stints at Reebok, Eastern Mountain Sports, Tommy Bahama, and Eddie Bauer.  We have to take note of the job-hopping factor into some questionable brands.


Fila to Use Real Women in Toning Apparel Campaign - Fila USA said it plans to feature real women as part of the launch campaign for the company's new Body Toning System fitness apparel collection. Original plans for the print and online campaign called for two professional models and one real woman, but the positive results of the New York City area casting call of non-professional models ages 25 - 50 prompted executives to consider a campaign that would feature just the local area finalists. <SportsOneSource>

Hedgeye Retail’s Take: Translation = ‘real women’ aren’t as expensive as professional models, but could have just as powerful an impact on a campaign as a hired gun.


Sport Brands Pursue Duty Relief in Second MTB Bill - The House Ways and Means Committee has posted a draft of a second Miscellaneous Tariff Bill (MTB), which proposes to extend or created temporary duty relief for more than a dozen sporting goods products and hundreds of chemicals and other inputs. As in the case of the earlier MTB passed in July, the Miscellaneous Trade and Technical Corrections act of 2010 would make duty relief retroactive to Jan. 1, 2010 for some products. Each individual bill is vetted by the International Trade Administration to ensure that lowering tariffs will not cause injury to any domestic manufacturers. Even so, leaders of the Republican Party have vowed to block any MTB as part of their pledge to oppose earmark legislation and balance the federal budget. The bill also includes the Affordable Footwear Act, which Outdoor Industry Association and other sporting goods trade organizations have been trying to pass since 2007. <SportsOneSource>

Hedgeye Retail’s Take: Consistent with the MTB Bill passed in July, the second iteration looks to extend duty relief for multiple inputs that primarily benefit sporting goods retailers. A notable new twist in the most recent Bill is that it includes the Affordable Footwear Act (AFA), which would be a substantial incremental positive for domestic footwear players. With Republicans standing firmly in opposition, there’s a long road ahead here, but with the inclusion of the AFA one that bears watching.


Lotte to Make Final Offer for Matahari's Stores, Competing With Carrefour - Lotte Group, the parent of South Korea’s biggest retailer, will make a final offer for PT Matahari Putra Prima’s hypermarkets to compete with Carrefour SA in Indonesia. “We’ve come a long way and we’ll make a final bid,” Hwang Kag Gyu, executive vice president of international and new business planning at Lotte, said in an interview yesterday. “There’s ample liquidity so funding won’t be a big problem" The purchase would give Lotte as many as 49 of the combination department store-supermarkets in an economy forecast to expand 6 percent this year. Units of Seoul-based Lotte, whose assets include petrochemical operations, are expanding in China, Vietnam, Indonesia and Russia to tap faster growth and rising affluence in developing markets. Matahari may sell most or all of its food-retailing business, which may be valued at $700 million to $1 billion including debt, people with knowledge of the deal said earlier this month. Wal-Mart Stores Inc. and French retailer Casino Guichard-Perrachon SA are among the retailers that have looked at Jakarta-based Matahari’s assets, according to the people. <Bloomberg>

Hedgeye Retail’s Take: With a store in nearly every mall and plaza in Indonesia, Matahari will likely draw more than just one bid as it looks to exit its retail business - particularly with growth markets in short supply for global retailers.


Time Inc.'s New Revenue Stream, Online Retail - Jack Griffin’s name has become synonymous with the phrase “new revenue stream.” And just a few months into his new gig at Time Inc., the chief executive officer now has one under his belt at InStyle with the launch of StyleFind, the first stand-alone shopping site to launch from a magazine. The fashion and beauty site, which makes its debut today, will live under the shopping channel on, but it will be run by a new crop of editors hired by InStyle. It features 150 retailers — including Saks Fifth Avenue, Neiman Marcus, Nordstrom, Net-a-porter, Gap, J. Crew, Mulberry, Topshop and Mango — and more than 2,000 brands that managing editor, Ariel Foxman, said are consistent with InStyle. “It will be like shopping with one of our magazine editors,” said Foxman. “The experience is edited and the search function actually works. If you search for bags with a chain, you will actually see that, but in different price points and brands.” <WWD>

Hedgeye Retail’s Take:  Just weeks after Google launched comes Time Inc.'s - another brand aggregator that provides a touch of fashion guidance. The most notable callout here is that it took this long to bridge the gap between physical stores and individually branded sites in the wake of flash-sale discount site success over the past year.


Gilt Goes Full Price - With a men’s business that now exceeds $100 million in sales, Gilt Groupe is plunging into a permanent full-price men’s business. The company is targeting a July launch to coincide with the release of pre-fall collections. It will offer apparel, accessories, athletic gear, gadgets and more and will include editorial content, as well.  The mix of brands will be similar to that currently found on Gilt Man, but items on the full-price site will be available for an entire season rather than for a finite period under the company’s current flash-sales model. Gilt executives would not reveal names of vendors who will be featured on the site, but John Auerbach, who has been named president of the full-price initiative, said it will be “a more curated version of what we offer now on Gilt Man.” He said 75 to 100 brands are expected to be featured. Over the past six months, Gilt Man has offered 10 full-price sales and the results were “tremendous,” Auerbach said, making this “the natural next step.”. <WWD>

Hedgeye Retail’s Take: After announcing that it will explore an apparel line of its own, the private sale pioneer is now looking to bridge the gap between store and discount site. As highlighted above, competition has been slow to materialize in the space, but we wonder how much of the Gilt's existing business it might cannibalize in the process.  Also, this will be the real test as to how scalable this business is.


Supreme Court denies Tiffany review in eBay counterfeit case - In a move with implications for e-marketplaces that sell products from independent sellers, the U.S. Supreme Court today denied jewelry retailer Tiffany & Co.’s request for reconsideration of its trademark infringement lawsuit against eBay Inc. Tiffany sued eBay in 2004, alleging that the e-marketplace company failed to prevent sales on of counterfeit versions of Tiffany jewelry. A federal judge in New York ruled in favor of eBay, noting that eBay couldn’t be held liable for the actions of independent sellers, and a federal appeals court upheld that ruling. <Internet Retailer>

Hedgeye Retail’s Take: The 6-year battle comes to an end...finally. With the ruling in favor of eBay, Tiffany will have to continue to bear the cost of policing 3rd party distribution sites itself. With customs now helping brands shoulder the cost of patrolling counterfeit imports, it looks like it will be up to the brands to police domestic distribution.


Cyber Monday Search Activity Jumps - Consumers are increasingly accustomed to scoring bargains on the day after Thanksgiving, also known as Black Friday, and the Monday following Thanksgiving weekend, frequently called Cyber Monday, says Dan Schock, Google Inc. retail industry director. That’s why searches for Black Friday on Thanksgiving and the following day were up 10%, year over year, and in the seven day period leading up to the Monday after Thanksgiving, searches for Cyber Monday and “Cyber Monday sales” are both up about 20% year over year, according to Google. Consumers first began searching for Black Friday in late August, says Schock. <internetretailer>

Hedgeye Retail’s Take: Evidence of two key factors: 1) Cyber Monday is relatively new to customers so they are less familiar with what to expect, and 2) that consumers are getting increasingly savvy to online research and find the best deals possible. Not surprisingly, the greatest increase in search came in the toy category suggesting that consumer's tolerance for blindly searching for in-stock 'it' items may be coming to an end.


November Fiber Price Sheet Update - The last Tuesday of every month, WWD published the current, month-ago and year-ago fiber prices. Prices listed reflect the cost of one pound of fiber or, in the case of crude oil, one barrel. <WWD>

Hedgeye Retail’s Take: Cotton isn't the only fiber up big year-over-year, but at 2x we should expect 2011 to be the year of alternative fabrics and blends.


R3: DECK, TBL, Fila, MTB Bill - R3 11 30 10



The Macau Metro Monitor, December 1st, 2010


According to a source, MGM China Holdings Ltd will target its IPO for 1Q 2011 at the earliest.  During its 2Q CC, CFO Dan D'Arrigo said the company hoped to list by the end of 2010.  Sources say BNP Paribas, Bank of America-Merrill Lynch, JPMorgan Chase & Co. and Morgan Stanley are the bankers on the deal, which seeks to raise about US$500 million.



In November, Macau’s casinos took in $17.354 MOP BN (US$2.17 BN), up 42.1% YoY.

Surviving The Future

"Every organization must be prepared to abandon everything it does to survive in the future."

~ Peter Drucker


After closing down for the 3rd consecutive day, the S&P500 ended up closing down -0.23% in November, doing less-bad than both the Nasdaq Composite and Dow Jones Industrial Indices which were down -0.37% and -1.01% for the month, respectively.


If you were long virtually anything other than the US Dollar (best major global asset class allocation for November of 2010, closing up +5.2%) in the last 3 weeks of November, you probably felt some pain. I did. The MSCI All World Index underperformed US Equities closing down -2.2% for the month and, depending on which Fixed Income strategies you had assets allocated to, November probably didn’t feel very good either.


So where do we go from here?


GAME ON: It’s DAY 1 of a new month and the perma-bulls are blasting out of the box, taking US futures up to another lower-long-term-high, repeating what they’ve said since the October 2007 peak – the world is “awash with liquidity” and “don’t fight the Fed.”


For us, it’s always a game of US versus THEM. Yes, we have a culture of picking fights. But we pick the ones we expect to win. When we lose, we are prepared to abandon almost every theoretical and qualitative assumption in our macro model.


It’s critical to keep them (Wall Street consensus) in the game. Without them, I don’t know how we’d go about Surviving The Future.


For them, it’s going to be very interesting to see who survives getting wiped out the 2nd time around. Sure, the world is “awash” with liquidity, but it’s also laden with sovereign debt. Absolutely, “fighting the Fed” was painful in October of 2007 and 2010, but it’s also been the fight worth fighting in both Novembers of those respective years. You have to know what you are fighting for. We are fighting the academic dogma of the Fiat Fools.


So let’s throw down and get at it this morning…


The #1 Headline on Bloomberg (most read) is: “Contagion May Force EU to Expand Arsenal To Fight Debt Crisis”


TRANSLATION: Predictably, the Big Government Interventionists (them) are out in full force this morning trying to get investors to believe that the solution to this European Sovereign Debt disaster = QE/EU.


The quants @Hedgeye are already tweeting about this phenomena of buy-and-hope – they’ve interpreted this academic solution as:


QG = QE/EU = Inflation


I know. This is the kind of quant that we spend hours on, laboring throughout the night. It’s amazing that we get any sleep over here at all. But it’s always encouraging to wake-up to real-time market prices and global activity that supports or refutes our case.


Here’s the real-time, globally interconnected, market response to QE/EU:

  1. Asian Equities UP
  2. European Equities UP
  3. US Futures UP

Oh wait, that’s just the stock market response. Silly Mucker.

  1. Fiat Euro UP
  2. Commodities UP
  3. Bonds DOWN

Right, right…


So, after getting powdered for the last 3 weeks, stock markets around the world have a dead cat bounce to lower-highs (on low volume), global inflation reignites to the upside (Oil is bullish TRADE and TREND at $85.10, Gold is blasting higher to $1392, and Copper is up +2.4% in a straight line), and the real global contagion on risk managers minds remains a flashing red light in the bond market.


All the while, Chinese stocks (which are down more than -10% in the last month and down -13.8% for the YTD) closed up a whole 12 basis points after China reported its highest INPUT PRICE number (73.5) since June of 2008. Yes, like QG (Quantitative Guessing) = QE/EU, the Chinese see inflation.


Chinese interest rate swaps just had their biggest melt-up since April of 2007 (+58 basis points = biggest monthly move in 3 years). That’s an explicit signal that China gave us then as it is now. It’s also similar to the one they gave us on global inflation in June of 2008 when The Ber-nank said he saw no inflation with $150 oil. China is going to continue to raise interest rates to fight Fed and ECB stoked inflation.


During the recent -3.7% correction in US Equities (from their November 5th high of 1225 on the SP500 when we had 15 SHORTS), I’ve pared back our SHORTS in the Hedgeye Portfolio to 9 positions. I’ll be looking to re-populate our short book on today’s strength. My immediate-term support and resistance lines for the SP500 are now 1173 and 1189, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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