Credit Problems: It's Not Just Dubai

This is more of a reminder chart than anything else, but don’t forget that worries about global credit are not just Dubai based.


In the chart below, Matt Hedrick and Howard Penney have outlined the recent activity in Greek CDS – as in the credit default swaps (CDS) of a country (Greece). The Greek stock market was down -7% last week for reasons that are not new this morning.


Issues with credit default swaps are also glaring in Japan. This has been one of the major reasons why we have remained short the Japanese stock market. When a country’s currency appreciates like Japan’s has (hitting 14-year highs today), it puts tremendous pressure on DEBTORS.


Again, this Aiful news out of Japan is not new, but maybe it matters more in concert when considered with Greece and Dubai. Japan’s 2nd largest consumer lender by assets, Aiful, is having major issues with their CDS. We are also seeing CDS issues related to Thomson (levered European media company) and Cemex (levered Mexican materials company).


Aiful – as in awful. That’s what a world addicted to debt gets – new spellings for new paradigms of globally interconnected risk.



Keith R. McCullough
Chief Executive Officer


Credit Problems: It's Not Just Dubai - cds


US Strategy: Managing Risk on Black Friday

Heading into an abbreviated trading day I’ve include our TRADE levels for the S&P500, US Dollar Index, VIX, Oil, Gold, and Copper in the charts below.


Howard Penney

Managing Director


US Strategy: Managing Risk on Black Friday - sp1


US Strategy: Managing Risk on Black Friday - usdx2


US Strategy: Managing Risk on Black Friday - vix3


US Strategy: Managing Risk on Black Friday - oil4


US Strategy: Managing Risk on Black Friday - gold5


US Strategy: Managing Risk on Black Friday - copper6


M: L&T Goes For The Win

On Bloomberg this morning, Lord and Taylor’s CEO said they took a contrarian approach towards Black Friday and the forward season by adding more inventory while competitors continue to cut and limit inventory. Like these guys or not, this actually makes a lot of sense to me. Mark my words, come 1Q, we’ll see our fair share of companies blaming weak sales on inventory limitations. Perhaps the perennially-underperforming L&T is left out of the mix this time around.  The SIGMA set-up below is pretty astounding. The sales/inventory spread has gone vertical.  A play on higher inventory is a binary outcome from here. GMROI will be feast or famine.



He also said November comps were trending as well as October comps as they expect low double digit comps like in October.


M: L&T Goes For The Win - Macy s SIGMA

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 80.52%
  • SHORT SIGNALS 78.67%

The 2010 Sneaker Setup Continues…

The 2010 Sneaker Setup Continues…


We continue to see athletic footwear trend up on the margin, reversing a 3Q trend where apparel dominated. Remember that athletic shoes has been one of the few categories that grossly underperformed in 2009. As each week passes we gain confidence in our call that 2010 will mark the year that this turns. Good for FL, FINL, NKE, KSWS and UA. On the flip side, the apparel trends – particularly as it relates to cold-weather apparel sales – are not looking good. Here’s a bit of trivia for you. How many coats are sold in the US every year? It’s about 300mm.  Get the pattern? Roughly 1 coat per person. Yeah, I know… some people buy 5 coats, while other use hand-me-downs for the better part of their lives. But overall, we’re talking a 1 to 1 relationship. This season started with penned-up demand, as well as very cold weather. Now demand is easing, and the temp has risen. I originally thought the weak comp guidance  thrown out there by guys like DKS for 4Q was simply conservative. Now it’s looking realistic (bad for DKS, COLM and VFC). Again…the play here is toward those who have more exposure to footwear.


The 2010 Sneaker Setup Continues… - Table Sporting Goods


The 2010 Sneaker Setup Continues… - Footwear and Apparel Sporting Goods Chart




IGT’s overreliance on “Wheel” games presents a big risk in the face of a now wide open playing field. Indeed, BYI is positioning itself to flood the market with its own Wheel products.

“The internet, that thing still around?” – Homer Simpson


While not quite having the global impact of the internet, “Wheel of Fortune” is by far the most successful casino gaming machine ever produced.  It’s been around for so long and production has been so stable that it’s almost an afterthought; its dominance has been unchallenged.  That is, until now.  We think IGT’s reliance, or should we say overreliance, on the Wheel is disconcerting and underappreciated in the investment community.


Wheel games comprise approximately 35% of IGT’s total participation installed base, or around 21,500 of 61,400 games.  Moreover, Wheels perform above the average IGT participation game.  We estimate Wheel games alone will contribute 30% and 50% of company-wide revenues and operating income, respectively, in F2009.  Let me say that again:  one line of products provides 50% of IGT’s operating income.  Astonishing. 




On October 22 of this year, a court ruling essentially invalidated the “wheel patents” that had protected IGT’s Wheel of Fortune from competition.  Competitors are now free to introduce their own wheel games.  BYI will no doubt take the lead here.  Indeed, the company introduced a bevy of new wheel games at G2E and plans to “flood the market” with wheel products.  Hey, we are focused on reaccelerating replacement demand and new markets too, but this issue is too important to ignore.



 November 27, 2009





Dubai leverage trumps $9 Blu-Ray players on this Black Friday. A Bottoming Buck has implications for retail, folks.



Welcome to Black Friday. But unfortunately, this Black Friday is marked not be $3 toasters and $9 Blu-Ray players, but by the situation in Dubai – with Dubai World learning the hard way that leverage is bad.   Not surprisingly, we are also waking up to the U.S. Dollar Index up as much as 1% - now up for two straight days.  The implication for everything priced in dollars is obvious. What is happening to Dubai World really does not change much for the typical American – not now at least.  As Howard Penney put it this morning, it’s a reminder that leverage is bad, the BUCK is bottoming and that the FED needs to raises interest rates sooner rather than later.  With the BUCK bottoming, you should take particular note of those consumer names that have been soaring due (whether obvious or not) to a weakening dollar. For Staples, this is flat-out bad. In a perverse way, this could be good for some names in consumer discretionary to the extent that a stronger dollar deflates the price of oil and frees up share of wallet.  Stay tuned on that one.


A final consideration is that when looking through the consistent bidders on US retail assets over the past three years, we’ve had US private equity, Asian strategic buyers, and Oil money. PE might have reared its head recently, but that’s temporary. Asian strategic and financial buyers are probably here to stay, which is good given that Dubai is clearly headed the wrong way.




  • Tiffany’s is starting to see some positive trends just as the company is also beginning to realize the benefit of favorable compares. While currency is now a tailwind, November sales are tracking favorably, and the recent boost in guidance are all positive – it’s important to keep in mind that December is a truly a make or break month for Q4 results.
  • Yue Yuen quietly added to its roster of private placements and subsidiaries this week. The Chinese footwear giant now has over 60+ such interests after making three private investments in Chinese-based footwear companies. With the company noting that sales had turned negative for the first two months in Q3 when it reported results back in June, the frequency of these deals are likely to pick up in the 2H as a means to manufacture top-line performance in the absence of more robust fundamental demand.
  • In an effort to attract appeal to a younger demographic, KSWS is offering a $10 iTunes gift card with a purchase of $50 or more. This approach caught our eye among the many deals to have come across our screens this morning from the perspective that 1) it’s a cross branding offering with a highly relevant brand, and 2) the offer resonates with a younger demographic – which is a key initiative for KSWS.




Wal-Mart Suppliers in China Accused of Labor Abuses- Wal-Mart's insistence on low prices for customers harms Chinese workers when its suppliers cut corners on health and labor standards to make the bottom line, a labor-rights group charged in a new report issued this week. In a report that studied five of Wal-Mart's suppliers in China, New York-based China Labor Watch said the world's largest retailer places utmost importance on the cost of its products, which often hurts thousands workers in China who make those products.  In addition to its massive supply chain here, Wal-Mart operates 250 stores in China. "This is not about a single factory, but about Wal-Mart's inability to implement its standards," the group's executive director, Li Qiang, said in a news release that called Wal-Mart's pricing structures "unsustainable." "Wal-Mart leverages its massive product orders to purchase goods at low prices, and workers suffer the financial burden," China Labor Watch's news release said. <>


PPR Reconfigures Retail Operations - PPR S.A. is reconfiguring its operations as it prepares to divest its retail businesses. Conforama, the French retail-to-luxury group’s home-furnishings unit, is taking over home-wares mail order company La Maison de Valérie from Redcats, PPR’s mail order division.  Financial details weren’t disclosed. “The complementary nature of the Conforama and La Maison de Valérie brands… will allow us to be swiftly competitive in the various sales channels and to increase our market shares as of 2010,” stated Conforama’s chief executive, Thierry Guibert. The move comes as François-Henri Pinault, chief executive of PPR, is looking to divest the company’s European retail business to focus exclusively on consumer and luxury brands, which include Yves Saint Laurent, Gucci and Balenciaga.Among the retail operations Pinault plans to sell are Conforama and Fnac, a books and electronics retailer.  Analysts have estimated that the two units could fetch around 4 billion euros, or $6 billion at current exchange rates, which PPR is expected to use to shop for apparel and accessories brands in a move to create a new mass-market division mirroring the luxury goods unit, Gucci Group. PPR already owns a majority stake in German activewear firm Puma AG. <>


Brow Shoe Executives to Retire in 2010 - The new year will bring some big changes to Brown Shoe Co.’s senior management team. The St. Louis-based company announced last week that Gary Rich, president of wholesale for the Brown St. Louis division, and Joe Wood, president of retail and Famous Footwear, would retire in 2010. As a result of the departures, the company has shifted the roles of several of its executives.  Rick Ausick, currently president of wholesale for Brown Shoe’s New York division, will assume the job of division president of Famous Footwear. Ausick previously had worked with Wood at Famous, as SVP and chief merchandising officer. Mark Lardie will take over as division president of wholesale, with responsibility for the Naturalizer, Dr. Scholl’s and LifeStride brands, as well as the company’s specialty retail stores. Lardie was most recently SVP and GMM. In another wholesale president appointment, Dan Friedman will assume the role of division president of wholesale, product and sourcing, with oversight for women’s specialty, children’s and celebrity artist brands, including Carlos by Carlos Santana and Fergie. Friedman was most recently SVP of product development and <>


Peet's Acquisition Quest for Deidrich's Coffee Heats Up - Diedrich Coffee, Inc. (NASDAQ: DDRX) has determined that the recently revised offer from Green Mountain Coffee Roasters, Inc. (NASDAQ: GMCR) continues to be a Superior Proposal to the terms of the merger agreement with Peet's Coffee & Tea, Inc. (NASDAQ: PEET) and the exchange offer contemplated thereby, as amended by the subsequent offer received from Peet's. As previously announced, GMCR has offered to enter into a merger transaction in which GMCR would acquire all of the outstanding shares of common stock of Diedrich Coffee for $32.00 per share in cash, pursuant to a merger agreement that contains substantially the same terms (other than the amount and form of consideration) as the merger agreement with Peet's. On Tuesday, November 24, 2009, GMCR further revised its offer to provide that such merger agreement would include a reverse termination fee of $8,517,000 that would be payable to Diedrich Coffee if the GMCR <>


Adidas to trial non-profit footwear factory - Following the footsteps of Otto Group, Adidas is launching a non-profit footwear plant in Bangladesh next yearto offer more jobs to the local community. Adidas spokesman Jan Runau will work with Bangladesh's Nobel prize winner, Muhammad Yunus, the pioneer of micro-loans which help the poor start their own businesses. Without any further details announced, the media suggested the company to trainers priced at just EUR1 for the millions of people around the world who cannot afford to buy shoes. <>


Billabong to Acquire - Billabong International Limited announced it has entered into a conditional agreement to acquire the United States-based online boardsports retailer (Swell). Swell, founded in 1999, is a online retailer in the US boardsport sector and sells many of the industry’s leading brands. Financial details of the purchase remain confidential, but the transaction is not material to the Billabong Group. Paul Naude, President of Billabong USA, said the acquisition would allow Billabong to manage its brands in the growing online market. "We look forward to growing the Swell business and further developing it as a showcase online platform for the US boardsports industry," he said. "The internet plays a significant role in the recreational habits of the youth market so it is important for our Group to ensure we provide them with a premium brand experience when shopping online. <>


Best Buy Europe profits to be at top end of expectations - Carphone Warehouse expects its share of full-year net income from Best Buy Europe to be at the top end of expectations and said it is on track to open big box stores next spring. The retailer also said plans to demerge retail and broadband operations by the end of March 2010 are proceeding to plan and banking facilities have been agreed. Best Buy Europe, a 50/50 joint venture between Carphone and US electricals powerhouse Best Buy, reported sales up 4% to £1.67bn (on a 100% basis) in the six months to September 30, when EBITDA rose 7% to £79m. Like-for-likes rose 3.1% but fell 0.9% on a constant currency basis. Carphone Warehouse chief executive Charles Dunstone said Carphone’s share of earnings from best Buy Europe is likely to come in at the top end of its guidance of between £30m and £40m. <>


Study suggests consumers will spend more than $340 billion online by 2013 - The Forrester estimates cover all types of online spending including retail, travel and ticketing. Total e-commerce spending will grow 11.3 % from $243.7 billion in 2009 to $271.3 billion in 2010, Forrester says, then an additional 8.9% to $295.4 billion in 2011, 7.8% to $318.5 billion in 2012 and 7.3% to $341.8 billion in 2013. Retail makes up the largest piece of the online spending pie with 58.5% projected for 2009 and 62.3% by 2013. Travel comes in second with 35.9% in 2009 dropping to 32.9% by 2013. Ticketing, including event tickets and movie tickets, will account for 2.5% this year and 2.3% by 2013. Other spending will make up 3% in 2009 and 2.3% by 2013, Forrester predicts. Retail will be the fastest-growing spending category over the next four years, growing nearly 50%. <>


European Confidence Improves to Highest in 14 Months - European confidence in the economic outlook improved in November to the highest since the collapse of Lehman Brothers Holdings Inc., suggesting the recovery in the 16-member euro region is gathering strength. An index of executive and consumer sentiment rose for an eighth straight month to 88.8 from 86.1 in October, the European Commission in Brussels said today. That was the highest since September 2008 and above the 88 projected by economists, according to the median of 27 forecasts in a Bloomberg survey. The euro-area economy emerged from its worst recession in over six decades in the third quarter after governments spent billions of euros on stimulus programs and the European Central Bank lowered borrowing costs close to zero. HeidelbergCement AG, Germany’s largest cement maker, said this month that it is “very optimistic” about the outlook. Rising unemployment and a stronger euro are threatening to undermine the recovery.  <>


Japan Prices Fall 2.2%, Reinforcing Deflation Concern - Japan’s consumer prices fell at a near record pace in October, reinforcing the government’s concern that deflation will hamper the economy’s recovery from its worst postwar recession. Prices excluding fresh food slid 2.2 percent from a year earlier after dropping a 2.3 percent in September, the statistics bureau said today in Tokyo. That matched the median estimate of 26 economists surveyed by Bloomberg News. Eight months of falling prices may intensify political pressure on the Bank of Japan to take action to combat deflation, which the government last week singled out as a threat to the world’s second-largest economy. Economic ministers said monetary policy should be used to bolster prices while central bank Governor Masaaki Shirakawa said providing more money alone won’t stimulate demand.  <>


French Consumer Confidence Soars, Beating Economists’ Forecasts - French consumer confidence rose for a fourth month in November, beating economists’ forecasts, as concerns about jobs waned and households showed more willingness to make major purchases. A gauge of household sentiment rose to minus 30 from a revised minus 34 in October, Paris-based national statistics office Insee said in a statement today. Economists expected a reading of minus 35, a Bloomberg News survey showed. The October figure was revised up from minus 35. French consumers, helped by tax cuts, state incentives to buy cars and falling oil prices, have boosted the economy this year, lifting France out of its deepest recession since World War II. Consumer spending rose more than expected in October as purchases of manufactured goods increased by 1.1 percent, Insee said on Nov. 24. <>


Retailers that don’t embrace mobile may lose ground, says study - 63% of shoppers will spend less this holiday season because of concerns about the economy, according to the Yankee Group’s Consumer Survey, and that means consumers will shop differently than in previous years. Retailers can capture more of those scarce holiday dollars by effectively communicating with consumers through their mobile phones, says the research firm in a new report entitled “‘Tis the Season: Mobile Retailing Will Transform 2009 Holiday Shopping.” Yankee Group predicts two dramatic changes in holiday shopping behavior this year. The first is consumers more carefully considering each purchase as they try to maximize every penny they spend, writes study author Christopher Collins, senior analyst. The second change is the emergence of technology-enabled shopping, as increased access to more powerful, and increasingly mobile, consumer technologies empower consumers to make more deliberate and informed purchase decisions anytime and anywhere, he writes.  <>


Bing is getting retail marketers’ attention - Retailers have spent 47% more on search ads on Bing in the first half of the fourth quarter of 2009 than during the same period in 2008, with Bing now accounting for 8% of all U.S. retailer search spend, compared with only 6% in the first half of Q4 2008, new research shows. Compared with Google and Yahoo, Bing also saw better year-over-year click volume growth. Average order values on Bing are 21% higher than across all search engines, which could account for the spend growth, according to a study by SearchIgnite, a paid search optimization company. Despite retailers increased allocation of their paid search dollars to Bing, Google still captures the lion’s share of retail pay per click advertising with 75% of all spend in the first half of the fourth quarter, compared with only 16% on Yahoo and 8% on Bing, the study says. <>

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