This note is to share our tactical insights into the ETF and options markets. ETFs and options have unique risks and may not be suitable for all investors.  Please consult with a qualified investment professional before investing in these instruments. 


During our quarterly strategy call earlier today, we received questions about the use of leveraged ETF products.


We do not like leveraged ETFs for overnight positions. The structure which allows theses products to be created, by definition, limits the correlation to the underlying security, commodity or index to intraday moves.  For investors who have an intermediate or long term directional conviction, and who wish to leverage their position, options on a non leveraged equivalent ETF or on the underlying index may be a viable alternative.


Some basics: purchasing an option limits the potential loss in the position to the price paid, selling an option without an offset in the underlying investment will expose an investor to a potential loss of either the entire underlying (selling a naked put) or an infinite amount (selling a naked call). In other words, if you haven’t used options before, read the educational literature on the CBOE’s website thoroughly and actually read the information your broker provides rather than just clicking “I accept” before you start trading.  We would encourage you to make sure your broker actually understands how these instruments work – sadly, not all do – before you entrust your capital to their advice. I can’t stress this enough (I have spent the majority of my adult life trading derivatives and have as many gruesome stories about accidents as a career EMT).


The crux of this matter is that purchasing an option contract that is out-of-the-money (above the underlying price for calls, below the underlying price for puts) provides a significant amount of leverage and can pay off handsomely with a big movement in price. The value of one of these “lottery tickets” evaporates rapidly however as the time to expiration erodes or the underlying price moves in the wrong direction, presenting a great deal of risk. Purchasing an option that is near the current price or even actually “in-the-money” will provide a lower risk of erosion based on time or price action, but the absolute dollar cost will be more significant and the potential payoff profile will be more limited than that of an out-of-the-money contract if there is a big move in the underlying.


Options can be a useful investment tool (provided that you do your homework first) but they may not present the tactical flexibility a shorter term investment requires. For an investor looking to capture a directional movement of a few days to a week, a directional position in an unleveraged ETF may well provide more maneuverability than an option position, while providing true (if unleveraged) performance tracking the underlying.


The only time a leveraged product that resets daily makes sense is when it is being employed intraday.  Your broker may not be able to explain this to you, because financial professionals are not required to be knowledgeable about ETFs, even if they invest their clients’ money in them.  Now more than ever, buyer beware.



Andrew Barber



Quick Take on Safeway

SWY reported $0.31 vs. Street at $0.29.  Slightly weaker identical store sales at -3% vs. Street at -2.6%.  In digging through the margins and expenses, it looks like gross margin while still down slightly, came in better than expected.


Guidance of $1.70-$1.90 for the year and $1.1-$1.3 billion in FCF are both unchanged.  Street is at $1.74.  Noticeably absent from the press release is any comment on the sales outlook (normally identical store sales guidance is provided ex-fuel).  It’s likely they will address this on the conference call at 11am, but I’d take this as a sign that sales trends remain unpredictable (or maybe even getting worse?). 


Bottom line, a slightly better quarter on margins but still a challenging topline.  The market is going to be excited about this headline beat (merely because they did not miss again) but overall nothing has changed materially enough here in my view.  Key to the commentary on the call will be any insight into deflation/inflation, which is the most important topic for those bullish on the grocers. 


As it pertains to KR (a name we have been short), there is nothing out of this initial release that suggests the market has changed materially or will change materially in the next few months.  More to come after the call at 11AM…


Quick Take on Safeway - SWY SIGMA


H&M comps are still down significantly on top of easy compares with little sequential improvement from the plunge in August caused by shortage of clearance/markdown inventory after the company’s “summer sale” left inventories too lean.  Sales did grow by 1% from new stores but this sales growth is the third worst month over the last 5 years (last month’s sales growth was the worst).  This is the first time I have seen H&M come out on their monthly sales update and blame the recession and the weather: “Sales were affected by the recession and unusually warm weather in September in most of H&M’s markets. Sales were satisfactory where the weather conditions were more normal.” The only commentary on sales from their monthly releases has discussed calendar shifts, not excuses.











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 80.46%
  • SHORT SIGNALS 78.35%

Gov't Retail Sales: Why The Excitement?

Why anyone with an objective process would get excited about today's Retail Sales report as new and bullish information is beyond me.


Maybe it’s a slow newsday, but the hype on the tape right now on retail sales numbers is pretty big. One of Kudlow’s guests is proclaiming that ‘the recession is finally over’. Maybe that’s true – but to base it on these numbers is irresponsible. Both the S&P and the MVR took off upon the release of the report.  The numbers are really right in line to anyone paying attention to other datapoints in the market. Are they a bounce off depressed numbers from last year? Yes. Is the 2-year trend slowly improving? Yes. But is trendline consumption still sub 0%? Yes. Remember that Oct-Dec of last year is when both consumption and retail sales fell apart. We need to see yy retail sales growth of 7% in both November and December in order to be flat on a 2-year basis.  In other words, we need some big numbers to sustain a lackluster underlying trend. If you want to get excited about that, be my guest...


Gov't Retail Sales: Why The Excitement? - 1yr


Gov't Retail Sales: Why The Excitement? - 2yr



October 15, 2009





This morning we had our first major unsolicited positive preannouncement – with DSW doubling annual earnings guidance to $0.70-$0.80 with half the year already in the bag. Implications for the stock are obvious – especially with over half the float short (can you say ‘pain trade’?). I’ve been warming to DSW in recent months, but given my structural concerns about the viability of the business I have not gotten myself over the hump of actually ‘liking it’.


Let’s step back a minute and look at the broader retail considerations. We’re looking at implied 4Q guidance for DSW comps of 4-6%, but on a two-year run-rate this still keeps comps trending around -1%. Remember the aggregate government retail sales numbers released yesterday that everyone got so excited about? Yes, the yy numbers look good, and will accelerate in the next 2 months. But on an underlying trendline basis? Flat – and we need to see them +10% in 4Q in order to remain flat on a 2-year trend basis (which appears to leave them with 2% - 3% of cushion in the full-year comp).


I’m not trying to be a killjoy here, but let’s not lose sight of the forest, when most are looking at the trees, and many are playing with the bark.











Some Notable Call Outs


  • Eddie Bauer is back and this time it has nothing to do with its recent bankruptcy proceedings. Surprisingly, the company just launched a premium line of outdoor apparel and gear called First Ascent. The products are priced at the premium level on par with The North Face and Patagonia. I received their catalog highlighting the launch and actually did a double take after seeing the Eddie Bauer name. Entering an already crowded space for premium outdoor apparel may not be the answer to all of the company’s problems, but at least they are taking a step in the right direction to re-introduce authenticity into the brand.


  • Burberry highlighted that ordering through Spring ’10 remains cautious by its U.S Department store customers, despite a recent pick up in momentum for the brand. The CFO went on to suggest that orders are being planned down double-digits for the Spring season. The department stores are also still ordering close to need and relying somewhat on reordering rather than upfront purchase commitments.


  • Add e-commerce to the list of features on Facebook with the addition of a web service/application called Payment. The application essentially allows any Facebook page to become e-commerce enabled, with transactions completed via an interface with Paypal. While the product is still in its early stages, it won’t be long before millions of Facebook users set up shop selling everything and anything.


  • Not a ton of new news out of GPS other than they are returning to television going into the holiday season. While not a total surprise it wasn’t confirmed until today. Management has been adamant that is would not return to television until they were confident in the merchandise. Some may view this as a vote of confidence in the product, however the jury’s out until we see some improvement in comps, which as late as September were below expectations.





-India: Chamber of Commerce Advocates Removal of Vat On Fashion Products - The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has urged the Finance Ministry and the Empowered Committee on VAT to remove the Value Added Tax (VAT) on products of fashion, especially with more than 50% handloom and handicrafts input to make them competitive in the global market. <>


-Advent Buys Charlotte Russe for $380M - Charlotte Russe Holding Inc. went private Wednesday after Boston-based Advent International Corp. completed the deal to purchase the teen retailer for $380 million and appointed Jenny Ming president and chief executive officer. In an exclusive interview with WWD, the private equity firm said it is looking to double the store count, boost sales productivity and reevaluate the demographic focus of the San Diego-based retailer. Ming, who succeeds John Goodman as ceo, has been an operating partner at Advent since 2008 and served as president of Gap Inc.’s Old Navy unit from 1998 to 2006. She will temporarily fill the position of chief merchandising officer, previously held by Emilia Fabricant. <>


-Fila Aiming to Become Fourth Largest Sports Brand - Fila is looking to become the world's fourth largest sports fashion brand in five years, its top executive said at a press conference in Korea. The goal is to more than double sales to reach $3 billion over that time frame. Fila Korea also announced intentions to go public sometime next year. Yoon Yoon-soo, chairman of FILA Korea and GLBH Holdings, the parent company of FILA global operations, made his comments during a presentation at the Fila 2009 Global Conference held at the Grand Intercontinental hotel in Samseong-dong, southern Seoul. "We aim to increase the global sales of FILA to $3 billion in the next five years and become the world's No. 4 sports brand," said Yoon, according to the Korea Herald. "We have secured a stable financial structure by completing restructuring over the years. Becoming the No. 4 sports brand is attainable," he said. FILA's global revenue is likely to reach $1.2 billion this year, a 20% increase from 2007 when Yoon took over the Italian sports brand. <>


-Saucony to Focus on Elite Athletes, Overall Male Consumer - In fulfilling his vision of Saucony becoming the next great global athletic brand, company President Richie Woodworth noted that it is imperative for the company to do a better job attracting male customers. Speaking at the Annual Institutional Investor Conference for Saucony parent company Collective Brands International, Inc., Woodworth said the new focus came after Saucony found it was noticeably over-indexed in women and under-indexed in men. "We said, 'Okay, if the marketplace is 62% men, 38% women, what are we?' Boom, we're exactly the inverse opposite," said Woodworth. The challenge, however, was attracting more men to the brand without alienating its "extremely loyal" women consumers. <>


-Target sets its sights on a digital newsstand - Target Corp. is offering digital magazines on a new site with partner Zinio LLC, a technology company that works with publishers to provide digital versions of print publications. offers single issues or annual subscriptions to magazines such as Marie Claire, Popular Mechanics, Elle and Woman’s Day. <>


-The Sports Authority's CEO Doug Morton Retires From Day-to-Day Operations - The Sports Authority announced that Doug Morton will be retiring as CEO. Morton, who has been with Sports Authority for 22 years, and served as CEO for more than a decade, will remain with the company as chairman of the board. <>


-Zappos Builds its Social Network - At Zappos, every employee is encouraged to tweet, post photos and videos, comment and blog freely on behalf of the $1 billion company. As a result, sometimes strange things end up online. Chief executive officer Tony Hsieh likes to post quotes that inspire him, such as “I failed my way to success.” Inspirational pieces have the biggest following among the Zappos customer base. Such statements “have absolutely nothing to do with sales, but it communicates our brand,” said Brian Kalma, Zappos director of user experience. “Instead of us trying to force product on them, we try to make them smile, make them laugh. It’s an opportunity to create a fun conversation.” <>


-Gucci Latest Luxe Brand to Use Social Media - To mark the launch of Gucci Eyeweb, a new collection of sunglasses aimed at “the digital generation” of 18- to 25-year-olds, the brand will unveil today a global, multilingual, social networking microsite that asks users to upload and share their photos. Their pictures will then rotate over a 3-D image of the sunglasses, looking as if they’re reflected in the dark lenses. Users of can switch among cities such as London, Milan, New York, Tokyo, Paris and Berlin to check out what their friends in each place are doing around the clock, and they can share their Gucci photo galleries on Facebook and Twitter. Next month, Gucci plans to swap the sunglasses, which cost $220, with ski goggles, so users can upload their winter holiday and weekend snaps. <>


-Ittierre Seeks More Funding - After securing a $44 million line of credit in February, which reactivated its industrial and commercial activities, Ittierre SpA confirmed Wednesday it has asked for an additional banking facility understood to be for the same amount. Ittierre, which produces collections under license for Just Cavalli, C’N’C Costume National, Galliano and Ermanno Scervino, and parent company IT Holding SpA, which also owns the Gianfranco Ferré, Malo and Extè labels, filed for the Italian equivalent of Chapter 11 bankruptcy protection in February after running out of cash. The additional 30 million euros, or $44.4 million, of liquidity is needed to help keep Ittierre operational while the government-appointed special commissioners continue their efforts to turn the company around. <>


-H&M sales hit by warm weather - H&M sales have continued to slide, down 8% on a like-for-like basis in September. The Swedish fashion chain blamed the decline on unusually warm weather in most of the markets in which it operates. H&M said sales in countries with colder weather were satisfactory. Overall sales rose by 1% reflecting H&M’s growth. The group had 210 more stores on September 30 than at the same time last year, bringing its total to 1,869. H&M’s comparable year-on-year sales have been in negative territory since January 2008. Like-for-like sales in August were down by 11% with total sales were down 3%. <>


-Burberry Revenues Rise 4.6% in Quarter - First-half revenues at Burberry Group plc rose 6.1% to 572 million pounds, or $915.2 million, from 539 million pounds, or $862.4 million, boosted by favorable exchange rates and nonapparel such as handbags, small leather goods, scarves and shoes. Figures have been calculated at average exchange rates for the six-month period. Burberry said Wednesday that, at constant exchange rates, revenues in the six months to Sept. 30 would have shown a decline of 5 percent, due to a 15% decline in wholesale sales, which was in-line with the company’s previous guidance. <>


-Converse Brings Back Star Chevron - Converse said the iconic Star Chevron logo will now be the primary logo on all Converse basketball footwear. The Weapon Evo, a basketball shoe evolved from the original Weapon, will be the first shoe to feature the logo again. <>


-Texas Retailers Feel Recessionary Pressures - Retailers here were shielded from some of the worst fallout of the recession because of the diverse economy, population growth and revenue from the oil and natural gas industries. But as key sectors adjust to new fiscal realities, the region is absorbing the impact of job cuts, rising store vacancies and home foreclosures. Some economists predict recovery in the state will outpace a national rebound. Experts at the Federal Reserve Bank of Dallas expect minimal, modest growth in Texas in the first half of 2010, said D’Ann Peterson, a business economist at the Fed. <>


-Zegna Continues Store Rollout Plan - Ermenegildo Zegna is pressing ahead with expansion in established and fast-growth emerging markets, introducing its global concept store format to Hong Kong and opening its first-ever boutique in Mongolia. After opening two flagship stores in Singapore’s ION Mall on Wednesday, Ermenegildo Zegna will inaugurate today its fourth Peter Marino-designed global concept store format in Hong Kong — following New York, Milan and Tokyo — and unveil a stand-alone Z Zegna concept store design created by Peter Marino. <>



RESEARCH EDGE PORTFOLIO: (Comments by Keith McCullough): NKE


10/14/2009 03:16 PM


McGough and I will take the other side of today's bulled up GS call. For the immediate term TRADE, NKE is a short at this price. Shorting high again... KM





NKE: Phillip Knight, Director, converted 5,000,000 shares of Class A Common Stock into Class B Common Stock and then sold 183,000 shares ($12mm).


ARO: Karin Hrtler-Garvey, Director, exercised 11,000 options ($462k).


NILE: Terri Maupin, VP of Finance & Controller, exercised 1,000 options ($63k).



  • Charles Whetzel, EVP, exercised 10,000 options ($280k).
  • David Pulver, Director, sold 25,000 shares ($700k).



  • Advent CR, Inc., bought 1.321mm shares ($23mm).
  • Frederick Silny, CFO, sold 174,000 options ($1.9mm).
  • Leonard Mogil, Director, sold 80,000 options ($242k) and sold 4,500 shares ($79k).
  • John Goodman, CEO, sold 200,000 options ($1.88mm) and sold 145,000 shares ($2.54mm).


FL: Ronald Halls, Pres. & CEO, sold 14,000 shares ($168k).


FINL: Gary Cohen, CAO, exercised 10,000 options ($63k).



  • Janet Grove, Vice Chair, exercised 25,000 options ($100k).
  • Karen Houget, CFO, exercised 23,000 options ($92k).


PETM: Thomas Stemberg, Director, exercised 35,000 options ($283k).


TGT: James Johnson, Director, exercised 9,000 options ($144k).



What are the Questions?

In the art of research, the question is often more important than the answer.  For obvious reasons, the answer will be a reflection of what and how the question is asked.  We always find it fascinating, the questions that our exclusive network of clients are asking.  Yesterday we held our Fourth Quarter theme call with a Q&A session afterwards.  Below, for your interest, I’ve outlined some of the questions that were asked from some of our subscribers during the session.


  1. Will you please comment on the owner equivalent rent component of CPI.  My understanding is that it constitutes 30% of the CPI read, will this have any impact in terms of your inflation view into the next quarter?   Could this component keep a lid on CPI allowing the Fed more room to keep their loose policies for even longer than warranted?

  2. What are your thoughts on commodities in Q4?

  3. Would you say that the “better/surer” play for the quarter (trend duration outlook)  is commodities/gold/oil over equities?

  4. Can you reiterate your inflation views when M2 has stabilized, and compare that to China, which you like, yet has M2 growth has spiked.

  5. As the weak dollar benefits exports and consumer saving increases, can the purchase of treasuries by domestic sources offset the exodus by foreigners?

  6. As we start comping on CPI, do you think that higher headline inflation levels will be a strong headwind to the market?

  7. What’s your near-term outlook for China – it’s been a central theme all year – now where do we go?

  8. And do you think there is a level where treasury buyers abandon their buying?

  9. Understanding that you are bullish the S&P while the USD continues to weaken, is there a level to which the USD could fall that will spell trouble for US equities?


We will not guarantee that we have all the answers, but starting with the right questions will get us closer to the answer to be sure.




Daryl G. Jones
Managing Director

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.