SP500 Levels Refreshed: Know When to Hold Them, Know When to Fold Them

The Thunder Bay Bear, our CEO Keith McCullough, is in Boston visiting some of Hedgeye’s top subscribers and discussing our macro themes, but primarily focusing on the outlook for equities in a continued Jobless Stagflation scenario.  Simply put, slower economic growth inhibits revenue growth and input price inflation squeezes margins, and the outcome is decelerating earnings growth.  Slowing earnings growth leads to lower multiples for equities.  It’s that simple.


Obviously along with the potential for a European sovereign debt pandemic today, this is what the stock and bonds markets have already been pricing in for the last six weeks.  As of intraday today, the SP500 is up ~+0.50% for the year and has corrected ~-7.2% from its peak on April 29th. Interestingly, though, the SP500 is still up more than 19% over the last 12-months.  The bond markets tell us a similar story as 10-year yields, as a proxy, are just more than 20% off their February 2011 highs of 3.6%. 


While the growth crowd is finding some solace in the Pandora IPO today, personally, watching Pandora trade today reminds me of the old Kenny Rogers song, “The Gambler”.  As the song goes:


“You got to know when to hold 'em, know when to fold 'em,

Know when to walk away, know when to run.”


The Thunder Bay Bear just called in between meetings and his message was clear, this is a short covering opportunity and nothing more.  The equity markets remain broken in our models with the key level of support, as outlined in the chart below, down at 1,223.  If we violate that level, make sure you “know where to run.”  In the meantime, I’ll make sure Keith tones down his growling for the rest of the afternoon.


As always, if you want to chat with Keith, myself, or the team, email us at and we can hop on the phone.  Risk is always on.


Daryl G. Jones
Director of Research


SP500 Levels Refreshed: Know When to Hold Them, Know When to Fold Them - DJ MACRO

R3: VFC, BBY, M, Cotton Import Fee



June 15, 2011






  • According to a recent survey by Acosta Sales & Marketing, there is startling divergence in grocery budgets by demographic. Households earnings less than $75k per year, which account for roughly 75% of the population, are reducing budgets by at least 10% while those earning above that level are increasing spending by up to 34% more. Trip frequency also plays a meaningful role coming into play when gas prices reach $3.70 at which point shoppers begin to cut back. The national average was above that level last week suggesting that we may see strip center outperformance begin to moderate.
  • The two key drivers of better than expected sales at BBY were mobile computing and phones (being the lead retailer for the Verizon iPhone launch didn’t hurt). What’s interesting to note here is the company’s new Tablet Central initiative its rolling out that will offer a one stop-shop highlighted competitive differences between models. Sounds just like what BBY is known for in TVs, which has proved to be a struggle in respect to actually converting traffic into sales.



VF Corp Set to Launch Vans to Target the Premium Indian Sector - Apparel manufacturer VF Corp is launching its Vans brand in India to tap into the ever-growing premium sector in the country. VF Arvind Brands, a joint venture between the US firm VF Corp and Arvind Group, has announced that it will open two Vans stores in the country, one in Bangalore and the other in Delhi. These outlets will market products from Vans signature men's and women's footwear lines, as well as apparel and accessories. "The demand for lifestyle products is growing. It is the right time to bring international brands into the country," said Kanchan Pant, managing director of VF Arvind Brands.  <FashionNetAsia>  

Hedgeye Retail’s Take: Zero downside. 1.2 billion people, 2.4 billion feet. Plus an established JV with Arvind Mills that is in its sixth year leaves little integration risk for VFC as it sends new brands to India.  This makes perfect sense to our Hedgeyes. Add that to this week’s TBL deal, and VFC continues to plow forward…


Macy's Mobile Marketing - Martine Reardon may put on the wrong shoes or forget her purse in the morning, but one thing she always has on her is her BlackBerry. “I can’t let it out of my hands,” said Reardon, Macy’s executive vice president of marketing and advertising, as she underscored the booming popularity of mobile communications and how Macy’s is embracing the technology. “Mobile is clearly a very important part of a consumer’s life, and a marketer’s life.…There are 300 million mobile subscriptions projected by the end of 2011,” said Reardon, adding that two to four years ago, it was less than half that.  Mobile devices and tablets have surpassed the usage of desktops and notebooks and “will become even more important from the point of view of a brand like Macy’s because it enables you to share that social space and shopping space at the same time.”  <WWD>

Hedgeye Retail’s Take: Hardly a visionary statement. The head of marketing and advertising using personal experience to discuss strategy for such a large and complex beast? C’mon… The true visionaries are the ones that are working on – and talking about – things that folks like us can’t even conceive at this point in time.  This is not a negative development by any means, but at a point where ‘Long Macy’s’ is one of the most consensus calls in retail, a story like this reminds us that there’s nothing super-human about this company. It’s simply a department store. That’s all. Nothing else.


ADT Study Estimates Store Theft Rose 12 Percent in 2010 - Retailers lost more than $37 billion to theft last year, according to an annual survey recently conducted by the University of Florida with a funding grant from ADT Commercial, a major security systems integrator. The National Retail Security Survey (NRSS) preliminary results show an increase in theft by nearly $4 billion, from $33.5 billion in 2009 to $37.1 billion in 2010. “It is possible this increase is due to the prevalence of Organized Retail Crime (ORC) where items are stolen in quantity and then resold to consumers on the Internet or at flea markets,” said University of Florida criminologist Richard Hollinger, Ph.D., who directed the survey. “The National Retail Federation just completed its own survey showing an increase in ORC activities with more than 95 percent of retailers saying they had been victims and almost 85 percent indicating that the problem had gotten worse over the last three years.” <SportsOneSource>

Hedgeye Retail’s Take: This synchs the reality that Home Invasions/thefts also tick up meaningfully during recessions due to cutbacks in police overtime hours. Ditto for retailers. With fewer eyeballs watching, there’s more opportunity. This article chalks it up to organized crime. I chalk it up to employees – they’re usually at the top of the ‘shrink’ list.  Here’s a funny anecdote…Ever go to a Six Flags? The game alley where you give a few dollars at a time to the 18-year old kid behind the counter is a double edged sword. It’s the highest margin attraction, but also the highest shrink as those dollars end up in pockets instead of cash registers. As a result, Six Flags installed cameras so the employees know they’re being watched. What they don’t know is that most of the cameras are simply a shell. They don’t work, but serve the intended purpose anyway.


Carol Brodie’s Rarities Breaks HSN Records - Carol Brodie likes to break the rules. The self-proclaimed “passionate and obsessed jewelry lover and collector” launched Rarities: Fine Jewelry With Carol Brodie — a high-end jewelry business — on HSN, a traditionally mass medium and the exact opposite of what everyone else told her she should do. Two years later, Brodie reigns as the top-selling jewelry line on the network and its online counterpart, — a feat, given the above factors and the current economic climate at the collection’s launch. “I did anything that I was told didn’t traditionally work on TV,” said Brodie, who spent almost a decade as Harry Winston’s global director of communications and has worked with De Beers, Ivanka Trump Fine Jewelry and Fabergé. “I was told big earrings weren’t something you sell on TV — and they are now one of my best-selling items.” <WWD>

Hedgeye Retail’s Take:  Ask Liz Claiborne… Home Shopping works – even though no one gives them credit for it.


USDA Proposes to Raise Cotton Import Fee - US Department of Agriculture’s Agricultural Marketing Service (AMS) is seeking comments by 5 July on a proposed rule that would increase the assessments paid by importers of cotton and cotton-containing products under the Cotton Research and Promotion Order.  These assessments would be raised by 16.4 percent from 1.088 cents per kilogramme to 1.2665 cents per kilogramme, which is based on the 12-month average of monthly weighted average prices received by US cotton producers. The revenues generated by these assessments are used to finance research and promotion programmes designed to increase consumer demand for upland cotton in the US and international markets. AMS is also proposing to revise the conversion factors and expand from 706 to 2,371 the number of HTS codes used to calculate the importer assessment. AMS notes that the inclusion of these additional codes would allow the programme to assess almost 100 percent of imported raw cotton and cotton-containing products, as it does with the domestic producer assessment. <FashionNetAsia>

Hedgeye Retail’s Take: Not devastating. But not the right direction – especially if you are overexposed to cotton-heavy, mid-tier brands (i.e. JC Penney).




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Just a little tidbit on ASCA. 



I was in Kansas City yesterday and visited ASCA KC.  It looks like the flow through has been very strong at the property so we should see sequential margin improvement.  KC is a major contributor for ASCA as its second largest property.  We think the read on ASCA KC provides further evidence that the company is on track to beat the consensus Q2 estimate of $0.45.  We are at $0.52.


We’ve been a little cautious about sequential VIP volume growth as Macau works its way through the summer.



While we clearly haven’t seen any evidence of a slowdown, our concern surrounds the historical 9 month lag between Mainland China tightening (higher discount rate and bank reserve requirement) and VIP volumes, which we’ve shown to be statistically significant (see our note: A VIP SLOWDOWN IN THE CARDS? (05/22/11).  Now the concern seems to be growing in the junket community as well.


While we need to do some more work in this area, it appears that some junkets fear that the significant underground banking industry in China is becoming a more attractive option for cash deposits than junket operators.  VIP liquidity is somewhat fueled by investors who get a fixed return on their money deposited with junkets.  That yield has been higher than the above board Chinese banks so there’s been no issue with keeping the junket liquidity engine pumping.  Now that government credit restrictions are tying the hands of the big banks, the underground banks have moved in to fill the significant credit demand.  With that kind of demand, these banks can afford to pay higher deposit rates than the big banks and even the junket operators.  Thus, money may start to move from the junkets to the underground banks.  Obviously, this could constrict junket liquidity, junket play, and ultimately VIP casino revenues.


While June has certainly been much slower than May, we cannot yet attribute the sequential slowdown to lower junket liquidity.  June is seasonally slower and May benefited from high hold.  We will be watching this closely and continuing to talk to market participants and will update you on any further findings.  In the meantime, we just wanted to point out the potential of this issue as it may be significant.

Athletic Specialty Apparel Performance Gap Widens


Athletic apparel sales slowed for the third consecutive week across the industry. Sales in the athletic specialty channel, however, diverged posting a significant sequential acceleration widening the recent performance gap between the two. ASPs in the specialty channel remain strong up MSD, but also turned sharply higher across the industry debunking concerns over potential inventory clearance activity – an incremental positive for margins early here in the 2Q.


Athletic Specialty Apparel Performance Gap Widens  - FW App App Table 1 6 15 11


Casey Flavin


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