Deng is Smiling

Research Edge Position: Long Chinese Yuan via etf CYB


Deng Xiaoping is the now deceased Chinese leader who took over the reins of China after Chairman Mao.   While Deng never held office as head of state or head of government, he did serve as the Paramount Leader (a Chinese expression for the leader of the party and country) of the People’s Republic of China from 1978 to the early 1990s.  Deng was of course known for implementing market based reforms.  In referring to economic policy the diminutive Deng once stated:


“It doesn’t matter if a cat is black or white, so long as it catches mice.”


His point was that if market based policies could expand the growth of the Chinese economy, then those were the appropriate policies to follow.


In 1978, China’s GDP in real terms was ~$147BN and it ranked eleventh in the world, while the United States ranked first at $2.3TN.  According to the IMF, and most other data sources, China is now ranked third globally with a GDP of $4.3TN, which is an increase of 292x in thirty years.  The United States’ GDP is now $14.2TN, which is an increase of 14x over the same time period.  Clearly, Deng would be smiling at this massive global GDP share gain over the last thirty years.


In recent days, we have seen continued evidence of the engine of Chinese growth, and the power of its stimulus program as it relates to car sales and home sales.  The Chinese consumer continues to power through the global downturn.  In October, Chinese passenger vehicle sales rose 76% y-o-y last month with a sales number of 946,400In total, this brings the year-to-date sales to +45.2%.  The test for car sales will of course occur at the end of the year, when stimulus measures, such as car tax cuts, expire.  The Chinese central bank also reported today that the prices of houses sold in 70 major cities rose 3.9% y-o-y, the highest rate in 14-months.


While many still question the impact of the U.S. stimulus program, except for the those on Wall Street who are benefitting from the Banker Bonanza, the Chinese seem to have gotten their stimulus package right, as their consumers are spending.


We remain long the Chinese Yuan as it seems likely that the Chinese government will continue to let their currency appreciate over time, as well they should given the relative strength of the domestic economy.


The Ox seems to be catching mice.


Daryl G. Jones
Managing Director



A Bearish German Expectations Report

Research Edge Position: Short the UK (EWU)


The ZEW Center for European Economic Research said its index of investor and analyst expectations, which aims to predict economic conditions six months ahead, fell to 51.1 from 56 in October, underperforming a forecast for a decline to 55. 


While we have some reservations on the accuracy of the ZEW survey, we have cautioned over the last weeks that we expect to see a sequential deceleration in improvement in German and European fundamentals with headwinds including the rate of improvement itself, a strong Euro, and rising unemployment as we move into 2010.


The chart below of the investor and analyst expectations shows evidence of a top, with the last two months in decline.  ZEW’s gauge of the current economic situation however rose to -65.6 from -72.2 in October.


Today’s announcement from the survey sent the DAX in retreated. Yesterday morning we sold our position in Germany (via the etf EWG) into a strong open to book a modest gain in our model portfolio. The DAX recently broke its TRADE line, but the TREND and TAIL durations remain bullish, so we’ll look to buy EWG back on weakness.  


Despite the sale and survey, within the Eurozone we continue to like Germany and expect that its large industrial and manufacturing base and export-driven economy will benefit alongside global economies melting up. Yesterday, two bullish data points were released: German exports rose 3.8% in September month-over-month and German Industrial Output increased 2.7% in September compared to the previous month. Finally, today October CPI held steady at a comfortable level of -0.1% Y/Y. Stay tuned.


Matthew Hedrick



A Bearish German Expectations Report - wohl


Chart of The Day: Covering The Bombed Out Buck

Is consensus on the US Dollar finally Bearish Enough?


Now it might be. When I re-shorted the US Dollar on October 20th, my answer was no. Everything has a time and price.


There are plenty of negative catalysts for the price of Burning Bucks that are now in the rear-view mirror:

  1. Bernanke - pandering to the political wind last week, keeping rates at an “emergency rate” of ZERO percent
  2. G20 – no one trusts Geithner or his suggestion that countries “take a chance again on the American economy”
  3. US Employment – that was a nasty report on Friday

However, in my risk management model at least, sometimes the best catalyst simply is price.


In the Chart of The Day, Matt Hedrick and I show a Bombed Out Buck price of $75.01 on the US Dollar Index. Do not mistake our call to cover our short position in the US Dollar for anything other than what it is – an immediate term (3-weeks or less) TRADE call.


The Bearish Formation (negative TAIL, TREND, and TRADE) for the US Dollar remains. But +1-2% rallies in the Dollar can wreak havoc on anything priced in dollars.


We’ll be outlining our views of price and duration on our long standing Burning Buck investment theme on our Macro Strategy Conference Call today, at 1PM EST. If you need access information for this call, please email .


Keith R. McCullough
Chief Executive Officer


Chart of The Day: Covering The Bombed Out Buck - zeebuck


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.


MPEL should report a consensus beating Q3 on Thursday.  However, the properties played lucky and October market share came back to Earth. Is that reason enough for a 37% sell-off since late September?



We are projecting Q3 EBITDA of $67 million for MPEL versus consensus of $55 million.  It’s no secret that City of Dreams (CoD) held very well in the VIP segment during the quarter.  We estimate a hold percentage 40-50bps higher than normal which boosted EBITDA by approximately $15 million.  As a partial offset, Altira held a little low.  We believe that company EBITDA will be in-line with consensus when adjusted to normalized hold.


Unfortunately for shareholders, the recent focus has been on market share in October when MPEL lost approximately 5% from Q3.  Most of the market share loss was concentrated in VIP since Mass share declined only 30bps from Q3.  In the VIP segment, MPEL held poorly in October versus very strongly in Q3 so share loss was magnified.  Indeed, in looking at just VIP turnover (chips), the market share loss was less than 3%.  On a sequential basis, October exceeded each of the Q3 months in terms of Mass revenue and VIP turnover so business is not exactly bad for MPEL.  The charts below show the picture.


The takeaway:  Q3 wasn’t as good as it appears but October wasn’t as bad.  Meanwhile, the stock is down 38% since late September.  The carnage seems a bit aggressive, particularly given the huge valuation discount to Wynn Macau (1128.HK) at 16x 2010 EV/EBITDA and the stated range for the LVS Macau IPO which we estimate to be 13x-17x.  In contrast, MPEL is trading at 11x our 2010 EV/EBITDA projection.  While a discount valuation is appropriate but the current spread seems excessive.




MPEL: HOLD WILL DRIVE GOOD Q3 - mpel mass rev1


MPEL: HOLD WILL DRIVE GOOD Q3 - mpel vip turnover1

US STRATEGY – Office Sharks

Gareth: If you’re so clever, what am I thinking now?

Tim: You’re thinking "how can I kill a tiger armed only with a biro?"

Gareth: No.

Tim: You’re thinking "if I crash land in a jungle will I be able to eat my own shoes?"

Gareth: No. And you can’t

Tim: What are you thinking Gareth?

Gareth: I was just wondering whether will there ever be a boy born who can swim faster than a shark.


-Excerpt from the British version of The Office


In the Early Look, Keith led with a quote from the well known British comedy Benny Hill.  Given that it is British Comedy day at Research Edge, we’ve led with a quote from The Office.  Similar to Gareth we have some questions. For example, is there a market that can continue to swim faster than its declining currency?


The S&P 500 has been up for six days in a row, rising 2.2% on Monday.  Yesterday’s rally was driven by the heightened appetite for RISK and the REFLATION trade following the G20 meeting over the weekend.  Despite its importance as the world currency reserve the G20 leaders refrained from addressing the weakness in the U.S. dollar.  Without any active support from the world’s leaders, the dollar index closed down nearly 1%, to its lowest level since August 2008.  As we know, that decline in the U.S. dollar foreshadowed a dramatic decline in the stock market in the Fall of 2008.  While we certainly do not adhere to single factor models, this decline in the U.S. dollar is a major red flashing light currently for U.S. equities.  As a result, we have raised cash in our asset allocation model to the highest level since July 1, 2009.


The heightened momentum behind the REFLATION trade helped many of the usual suspects outperform yesterday.  The three best performing sectors were the Industrials (XLI), Financials (XLF) and Materials (XLB).  The Financials were the best performing sector, up 3.6% on the day.  There was no one catalyst for the strength other than U.S. dollar weakness.


The Materials rose 3.3% yesterday, and notable gainers included the metals and mining stocks and paper and forest products.  In the industrials sector, E&Cs and machinery stocks did the best.  


The worst performing sectors were Utilities (XLU), Healthcare (XLV) and Consumer Staples (XLP).  Managed care stocks finished higher for a sixth straight session today with the HMO leading the way.  The performance came despite the fact that the House approved its version of healthcare reform legislation this weekend.


Homebuilders are poised for a positive day today as Beazer Homes reported a fourth-quarter profit.  The Company reported “some moderation” in weak market trends.  New home orders rose 2.4% from a year ago, and cancellation rate improved from 34.7% to 46.3%.  In the pre-market the stock was up 7%.


Today, the set up for the S&P 500 is: TRADE (1,067) and TREND is positive (1,032).   The Research Edge quantitative models have 9 of 9 sectors in the S&P 500 positive on TREND and 8 of 9 sectors are positive from the TRADE duration.  Financials are the only sector not positive on both durations. 


The Research Edge Quant models have 0.5% upside and 2.5% downside in the S&P 500.  At the time of writing the major market futures are poised to open up small to the downside. 


The Research Edge MACRO Team.


US STRATEGY – Office Sharks - SP11 10


US STRATEGY – Office Sharks - CHART11 10SV




November 10, 2009


We’ve seen a bifurcation is sentiment within retail. Given the current set-up, we’ve got to particularly weigh earnings catalysts vs. incremental changes in expectations. It matters now more than ever.




In our virtual portfolio we went to 69% cash this morning, and took US and Int’l equities down to only 3% each as a percent of the portfolio. As it relates to retail, two things are front and center for me – 1) catalysts and 2) sentiment. Let’s take a look at the latter.


Our analysis below triangulates short interest as a percent of float (Y Axis) with our Sell-Side Sentiment factor rating. We’ve definitely seen movement here in the past few weeks.


Call Outs:

  1. This market hates, hates, hates, LIZ, UA, SKS, CAB, ETH, GAP and SHLD. These are names where both the buy side and sell side are overwhelmingly negative.  Others to keep an eye on: DDS, BONT (flashed green on stock screen frequently), COLM and OSTK. HIBB is worth noting as well – though sell side is positive, the buy-side is polar opposite.
  2. On the flip side, there’s no shortage of names where there’s a buy/sell-side love fest love fest. Those include GIL, COH, AMZN, GCO, DLTR, KSS, TGT, WMT, CVS, TJX, KR, and VFC.  If you’re long these names and can’t find a positive earnings catalyst – you might be in the wrong place.





Some Notable Call Outs


  • Hidden in Crocs’ recently filed 10-Q was the disclosure of a lawsuit filed against the company by Porsche. The lawsuit essentially alleges misuse of the “Cayman” name, which in this case is used for both the iconic Crocs clog and the mid-level sports car. While I’m not a lawyer or legal expert, it is hard to believe Porsche really thinks consumers are confusing the luxury car with the rubber shoe. After all, wasn’t Cayman a tropical place even before either of these products existed?


  • According to the eholiday study, four out of five e-commerce sites will offer free shipping this holiday season, however many offers will have “strings attached”. In other words, minimum order size, quantity of items purchased, or date restrictions will likely determine “free” eligibility. Approximately 57% of sites are expected to offer straightforward free shipping with no stipulations.


  • In one of the more head-scratching licensing deals we’ve seen in a while, Jamba Juice (yes, think smoothies) struck a deal to develop a line of branded apparel. The t-shirts, sweatshirts, headwear, and totebag are slated to be sold in mass, specialty, and upscale retailers. There’s nothing like developing an apparel line in an effort to sell more smoothies. It would be one thing if the actual Jamba stores were selling some logo apparel, but targeting other retailers seems like a lofty goal.





Firms Loaded With Cash in Position to Diversify - As weaker fashion companies scramble to keep goods flowing and the bankers at bay, the powerhouses that managed to sock away money during the credit crunch might just start putting their extra millions to work. Options include new lines of business, IT makeovers, store refurbishments and even acquisitions. You may still see some companies starting to wade back out there and start to spend some money. Still, the world hasn’t stopped. Retail stocks hit a 52-week high on Monday. The stockpiles make these firms, and a few others, doubly dangerous. Not only do they have the underlying businesses that produced that cash, but the funds also now give them the flexibility to adapt and take advantage of the shifting retail and fashion landscape. <>


Talbots Said to Seek to Refinance Debt, Hire Perella as Adviser - Talbots Inc., the U.S. women’s clothing chain, hired an adviser to help it refinance about $225 million in debt, according to two people familiar with the situation. Talbots hired Perella Weinberg Partners LP, according to the people, who declined to be identified because the decision hasn’t been made public. The chain, based in Hingham, Massachusetts, has posted losses for the past five quarters. Chief Executive Officer Trudy Sullivan has made three rounds of job cuts since 2008, with the company saying in June it would eliminate 20 percent of its corporate positions. Talbots posted a loss of $24.5 million in the quarter ended Aug. 1. <>


Apparel Importers Pressure Suppliers as Sales Lag - Apparel importers are looking to their suppliers to provide greater value and efficiency as they confront a challenging holiday season and an anticipated slow rebound in consumer spending. During last week’s annual Textile & Apparel Importers Trade & Transportation Conference in New York, speakers at all levels of the supply chain indicated that most of them were treading water as they awaited a significant change in the consumer psyche. At the same time, brands, retailers, suppliers and logistics providers were aware that the depressed business environment could drag them under before that moment arrives. “This recession has taught us one thing — consumers are consuming less and saving more,” said Janet Fox, director of sourcing at J.C. Penney Co. Inc. and chairman of the U.S. Association of Importers of Textiles & Apparel. <>


China Targeted in Antidumping Measures - Three emerging economies — Argentina, Brazil and Turkey — launched the largest number of antidumping investigations on textile imports in the 12 months through June, with shipments originating in China the most heavily targeted, a new World Trade Organization report said. Out of 28 new cases, Argentina and Brazil initiated seven antidumping actions each, Turkey had five, and India and Indonesia each had three. Argentina launched investigations on imports of Chinese fibers and yarns, denim and plain weave fabric, and separate cases against imports of fibers and yarns from India, Indonesia and Taiwan, and shipments of plain weave fabric from Brazil. Under global trade norms, dumping occurs when an exporter sells goods abroad at a lower price than they trade for in the home country or at below cost. <>


IT Holding Restructuring Under Review - The special commissioners for IT Holding SpA, which has been in government-backed bankruptcy protection since February, submitted their restructuring plan for approval on Monday to Italy’s minister of economic development. A company spokesman said an abstract of the report, which is expected to recommend a breakup of the group, would be made public in the next few days, but was unable to confirm when a decision could be expected from Minister Claudio Scajola. Commissioners Andrea Ciccoli, Stanislao Chimenti and Roberto Spada invited letters of intent at the end of September to identify possible buyers for some or all of IT Holding’s assets. Ciccoli told WWD in October the plan may or may not include recommendations to break up the fashion group, although experts believe a sale is likely. <>


Wilkes Bashford Files Voluntary Chapter 11 - Wilkes Bashford, the San Francisco-based men's wear institution, has filed a voluntary Chapter 11 petition. As part of the agreement, Bashford has reached an agreement with the Mitchell family of Westport, Conn., to acquire the assets of the business. The deal is subject to an auction process and approval of the bankruptcy court. In a statement late Monday, Wilkes Bashford, chairman, said, "During this period, it will be business as usual. Customers will continue to be served by our world class associates and we will continue to provide our customers with their favorite fashions." <>


US: CPSC to vote on product safety recommendations -The US Consumer Product Safety Commission (CPSC) will vote on recommendations proposed by Intertek and the American Apparel and Footwear Association (AAFA) regarding testing of children's goods including apparel. The CPSC's approval of their guidance document on Consumer Product Safety Improvement Act testing and certification procedures would codify Intertek and AAFA's recommendations as formal agency policy. The industry foresees that successful adoption of the policies would "save manufacturers millions while improving reliability of product testing". <>


Hong Kong: Q3 domestics exports fall sharply - Hong Kong recorded sharp falls in the value of its domestics exports in Q3, according to the Census and Statistics Department of the Hong Kong Special Administrative Region, with the apparel industry suffering most. The value of garment exports falling 84.7% year on year to 1.1 billion HK dollars (US$141 million). The basic metals industry trailed with a fall of 49.1%, followed by the paper and paper products, and printing and reproduction of recorded media industry. The chemicals and chemical products industry was also one of the biggest losers. The computer, electronic and optical products industry saw a fall of 8.8% in the value of domestics exports. The above five industries together accounted for 60% of Hong Kong's total domestics exports, or the exports of goods produced or manufactured in Hong Kong. <>


Forever 21 Founders to Give Deposition - The founders of Forever 21 will be deposed in a copyright lawsuit filed by Express, a Los Angeles judge ruled. Express charged in a lawsuit filed in California’s Central District Court in June that Los Angeles-based Forever 21 copied four of its copyrighted plaid patterns for men’s shorts that were introduced in its stores in December 2007, and also alleged trade dress infringement for a zippered jacket the retailer introduced last December. A trial is set to begin in September. <>


Retail Stocks Reach 52-Week High Monday - Retail stocks hit a new 52-week high Monday, rising 2 percent as global markets rallied after the finance ministers and central bankers of the G-20 said they would continue to support the economy until the recovery finds its footing. The S&P Retail Index retook the 400 mark, advancing 7.74 points to close at 403.08, near its high for the day. <>


'Middle-class shoplifters' in record crime wave - Levels of shoplifting hit a record high over the past year as the ‘middle-class shoplifter’ turned to crime to fund a high standard of living in the recession.

Shop theft in the UK soared nearly 20% during the past 12 months, costing retailers a record £4.88bn – a £750m increase on last year. According to the 2009 Retail Global Theft Barometer, the UK tops the retail crime league table in Europe. Clothing and accessories experienced one of the steepest increases, rising 8.8%, with branded and designer clothing, football shirts, lingerie and leather goods proving particularly popular among shoplifters. <>


Goodman Joining Sears as Chief of Apparel and Home - John Goodman, the well-traveled retailer who was most recently chief executive officer of Charlotte Russe Holding Corp. in the months leading up to its acquisition by Advent International Corp., has rejoined Sears Holdings Corp. as executive vice president of apparel and home, a new post. He will also serve as interim president of Kmart Apparel until a permanent officer is named to that post. Sears said Goodman will be based in San Francisco and establish an office there for the company along the lines of the design office set up in Manhattan three years ago. He reports to Bruce Johnson, interim president and ceo of Sears. <>


Google pays $750 million for a mobile ad technology company - Google Inc. has agreed to acquire AdMob, a mobile display ad technology provider and ad marketplace, for $750 million in stock. This acquisition will enhance Google’s existing expertise and technology in mobile advertising, while also giving advertisers and publishers more choice in this growing new area, Google says. <>


ARO announced its plans to donate 100,000 brand new winter coats to homeless teens this holiday season - The donation is the culmination of Aeropostale's year long initiative to improve the lives of the growing number of homeless teens throughout the United States and Canada. During the month of November, Aeropostale will be delivering these coats to over 130 shelters and homeless agencies in all 50 states and Canada. Aeropostale designed these 100,000 coats exclusively for this outreach program; they will not be available in its stores or online. <>






  • Michelle Wilson, SVP, sold 9,600 shares in a 10b5-1 trading plan transaction for a gain of $1.15mm.
  • Tom Alberg, Director, sold 1,700 shares is a 10b5-1 trading plan transaction for a gain of $204k.


RL: Jakcwyn Nemerov, EVP, sold 10,500 shares for a gain of $840k.


FDO: Charles Gibson, EVP, sold 10,500 shares after exercising options to buy 10,500 shares for a net gain of $92k.


BGFV: Steven Miller, President & CEO, sold 5,000 shares for a gain of $89k.


TUES: Madison Dearborn Partners, 10% Owner, sold 20,000 shares for a gain of $65k.


ICON: Yehuda Shmidman, EVP-Operations, sold 3,300 shares for a gain of $34k.




As we often say at Research Edge, prices don’t lie. The market is always telling us something. Here are some names that are showing outside movements relative to the market, peers, and volume trends...


  • Consumer electronics was the best performing group with large volume driven by gains from RSH (which was upgraded yesterday – probably the right call).
  • Leisure equipment and products and apparel, accessories, and luxury goods outperformed yesterday on positive volume – a reversal of a weakening volume trend. RL, LIZ, JNY, OXM, PERY, and COH led the apparel, accessories, and luxury goods sector while only KCP, DLA, and APP took losses yesterday.
  • Internet and catalog retail was the worst performing sector with only a 0.2% gain for the day on light volume. LINT.A, LQDT, DSC, BIDZ, and PAYD helped internet and catalog underperform.
  • Outperforming stocks yesterday included ZLC, RSH, CHRS, and BKS. BKS is a big callout because it has had one of the largest turnarounds of any consumer discretionary stocks. Looking at the longer trends, this stock marked a bottom about 2 weeks ago off of longer broken durations and has been gaining momentum on the 1 week and 1 day with volume to confirm it all. ANF gets a positive callout for making the list of top 9 retail stocks for the first time in ages.
  • GOLF, CROX, ZUMZ, PSUN, and BIDZ were the worst performing stocks yesterday. CROX is breaking down on all durations but volume is weak.





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%