Bernanke's Letter V

He Who Sees No Data (Bernanke) can look at the following chart, and pretend no one else is looking.  He claims to be “data dependent”, but that must be a joke.


This morning’s ISM Non-Manufacturing reading for the month of December came in above the all so important 50 line (economic expansion line), at 50.1. This was another sequential improvement versus the November reading of 48.7.


Now, both the ISM Manufacturing (released earlier this week) and Non-Manufacturing surveys are holding at/or above the levels we saw in early 2008. These, to the plain eye, look a lot like the Letter ‘V’. Unfortunately, the willfully blind of Washington groupthink aren’t allowed to see these charts, and the rate of return we are issued by the US Government on our savings accounts remains ZERO as a result.


I am by no means suggesting that this V-bottom is sustainable. But I am definitely not refuting that a V-bottom has occurred. It’s now a fact. To have witnessed the incompetence of the US Federal Reserve’s forecasting ability in missing this chart on the way down in late 2008 was one thing. Now we are seeing them miss the entire bounce on the way up, and it is both professionally embarrassing and sad altogether.


I remain bullish on US Treasury Yields (short SHY) and bullish on the US Dollar (long UUP) for the intermediate term (3 months or more). Either the Fed’s mea culpa is coming, or something far darker than I can imagine for America’s place of leadership in setting global monetary policy.


America’s Creditors are watching.



Keith R. McCullough
Chief Executive Officer


Bernanke's Letter V - ISM6


Bingo!: U.S. Debt Watch

“If you establish a democracy, you must in due time reap the fruits of a democracy. You will in due season have great impatience of the public burdens, combined in due season with great increase of the public expenditure. You will in due season have wars entered into from passion and not from reason; and you will in due season submit to peace ignominiously sought and ignominiously obtained, which will diminish your authority and perhaps endanger your independence. You will in due season find your property is less valuable, and your freedom less complete.” –Benjamin Disraeli


As we roll our broader coverage and expand our focus on the macro research side of our business in 2010, one area of focus will be sovereign indebtedness, which changes daily.  Internally, we have ceded the critical role of following the national debt of the United States to Darius Dale, and you will likely be seeing some notes from him on this topic in the near future.  As a precursor to what will become an ongoing discussion for us, I wanted to outline some key facts relating to the burgeoning U.S. national debt:

  • Total current U.S. National Debt - ~$12.17 trillion;
  • Total current U.S. National Debt per taxpayer - ~$111,622; and
  • Debt to GDP ratio – 83.5%.

These numbers are subject to some debate and we have sourced them from  Setting aside specific debate on the precise number, the point remains the U.S. National Debt is large and expanding.  The key components of this debt are as follows:

  • Medicare and Medicaid 21.9%;
  • Social Security 19.2%; and
  • Defense and Wars 19.1%.

U.S. National debt as a percentage of GDP has been climbing steadily since 2000, and has seen exponential growth in the last two years.  At the current ratio of ~83.5% debt to GDP, we are at level not seen since the 1950s. We have outlined this metric in the chart below going back 90 years. By the end of 2010, this number is projected to be near 100% of GDP absent a dramatic shift in domestic budgetary policy.  As with any borrowing, the more a person or entity borrows, even the United States of America, the cost of borrowing will go up, all else being equal.  This will have an increasing impact on the pricing of U.S. government securities in time.


Interestingly, the national debt of ~$12.17 trillion, actually excludes Fannie Mae and Freddie Mac debt.  The U.S. government became the effective conservator of both of these entities with the Housing and Economic Recovery Act of 2008.  The estimated combined on and off balance sheet debt of Fannie and Freddie is purported to be just over ~$5 trillion. Including this additional $5 trillion in debt, U.S. Government debt as a percentage of GDP is actually more than ~120%.  On that basis, U.S. government debt as a percentage of GDP is the highest ratio it has ever been, or at least since the numbers have been recorded, which is since 1792.  Needless to say, both ever, and since 1792, are a long time.


Globally, this data hasn’t been updated since 2008, but based on 2008 data, the U.S. has the fifth highest indebtedness as a percentage of GDP, just barely above Singapore and just below Jamaica, man.  The only other countries more indebted than the U.S., on this basis, are the economic stalwarts of Zimbabwe, Japan, and Lebanon. 


Keep your eyes  on U.S. government debt . . . this Queen Mary is not turning any time soon and will hold investment implications related to many asset classes for years to come.  Not to mention, as former British Prime Minister Benjamin Disraeli states above, implications for our very freedom and prosperity.


Daryl G. Jones
Managing Director


Bingo!: U.S. Debt Watch                - feddebt



Divergence of trends between QSR and Casual Dining and comments on sales trends in Texas!


Yesterday, SONC reported horrific fiscal first quarter 2010 same-store sales trends, with partner drive-in comparable sales coming in down 9.1% relative to the street’s -4.6% estimate and my -5.% estimate.  This 9.1% decline implies a 200 bp deceleration in 2-year average trends from the fourth quarter.  And, based on management’s comments on the earnings call, the freefall in top-line trends continued into 2Q10.  Specifically, management stated, “The environment continues to be a challenging one from the standpoint of the industry, so heavily focused on price and moving into the winter months that's traditionally when there is so much more sensitivity to cost anyway post holiday season, and you add to that the unpredictable weather mix that we've had December moving into January. And our perspective is that the same-store sales will continue to be a challenge moving into our second fiscal quarter, our fiscal quarter ending February.”


SONC is not the only company citing challenging weather in December.  This morning CKR reported period 12 comparable sales trends for the period ended December 28 and attributed the 6.5% decline in blended same-store sales to “ongoing weakness in the overall economy coupled with poor weather conditions negatively impacted both brands' sales results during period 12.” Same-store sales at Carl’s Jr. declined -8.9%, pointing to a nearly 130 bp decline in 2-year average trends from the prior period and marks the fifth consecutive month of sequentially worse trends.  Hardee’s -3.2% comparable sales decline came in sequentially worse on a 1-year basis but the concept’s 2-year average trends have remained relatively flat for the past 6 months.


So we have gotten two worse than expected data points on QSR trends in December while the only glimpse of December out of the casual dining operators (that I can recall) was the more favorable comment made by Darden.  On its last earnings call, the company said, “The sequential improvement in same-restaurant sales has continued so far in fiscal December for both the industry and for our brands after adjusting for the estimated impact of the Thanksgiving shift. However, we're still early in the month and weather can always be a factor in December.”  The casual dining operators are facing easier comparisons than the QSR industry, but both SONC’s and CKR’s recently reported numbers point to increasingly worse results on a 2-year average basis.


To that end, Darden did not clarify whether December trends were looking better on a 2-year average basis or whether the improvement is the result of the industry’s (as measured by Malcolm Knapp) easiest comparison from calendar 2008 when comparable sales declined 9.5%.  It is important to remember that casual dining trends in November improved on a 2-year basis.  We have yet to learn how December played out for the casual dining operators, but like Darden said, weather can always be a factor in December and if SONC and CKR are any indication, weather was a factor.


SONC also pointed to recent weakness in Texas to explain the company’s worse than expected trends.  Management stated that the “higher unemployment that we've been experiencing for a while in the more recent past more negatively impacting our brand because of the late impact of the recession on some of our core markets such as Texas and Oklahoma, and so with a more pronounced impact on those markets in the more recent past, their shift having a more pronounced effect on our brand and on our system than some of our competitors.”  In an attempt to provide some proof of the slowdown in Texas, management cited the fact that the sales tax collection statewide was -12% in October and -14% in November.  And, with SONC having about 45% of its partner drive-ins located in Texas this recent YOY slowdown disproportionately impacts its numbers.


If SONC management is correct in its assessment of the current situation and the macro environment in Texas is largely to blame for its fall off in trends, then that will have an obvious impact on players with high geographic exposure to Texas.  EAT, PFCB, TXRH, BJRI and JACK all come to mind.  Looking back at the regional trends provided by Malcolm Knapp, Texas was the best performing region of the country in late 2008/early 2009 so on a YOY basis, Texas is currently lapping more difficult comparisons than much of the country. 


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%

Gas vs. Retail: History and Math Don’t Lie

Gas vs. Retail: History and Math Don’t Lie

Looking through the pages of history, we see that gas prices aren’t always quite as consistently relevant to retail sales as many might think.


Here’s a mixed bag to start the year off.  Retail gas prices at the pump are over 50% higher than they were last year. Aside from the obvious fact that starting in late January gas prices start to lap an increasingly favorable compare vs last year, we find it interesting to look through the pages of history and see that gas prices aren’t always quite as consistently relevant to retail sales as many might think. Huh??  


Throughout the 1990’s, total retail sales (ex energy) and prices paid at the pump had a 37% correlation. Then, in the first half of the 2000’s there was a 45% correlation. The correlation rose even higher to 74% in the back half of the decade, and was 89% over the last 2 years. Check out chart 3 below, which shows how the spread between retail sales and gas has been increasingly volatile in recent years while putting it higher highs and lower lows. We agree that each period needs to be taken in isolation and dissected to drill down factors that are specific to that time. But the lack of long-term support is tough to ignore.


The month of December will be a historical peak in the spread between total retail sales growth and year-over-year pump price growth, due to gasoline’s 53.7% increase y/y.  Not for a minute will we ever buy into an argument suggesting that higher gas prices is good for retail sales. But the ‘higher gas is the enemy’ argument just fell a notch  on our list of things to watch.


Gas vs. Retail: History and Math Don’t Lie  - 1


Gas vs. Retail: History and Math Don’t Lie  - 2


Gas vs. Retail: History and Math Don’t Lie  - 3



R3: ICR Pre-Announcement Season Roadmap


January 6, 2009


Here’s an overview of which companies have set a precedent in pre-announcing results in advance of the annual ICR conference, which takes place next week in So Cal. We’ll be out with a Black Book and conf call on Friday discussing key ‘Predictable Unpredictables’ for ’10, which should be good ammo for interviewing management’s at the event.





In light of the ICR Conference next week, we looked back over the last 4 years to see which companies have a history of pre-announcing either before or at the conference. Keep these companies on your radar as there will be a lot of action around the conference.  Below is a table with ICR participants that have a preannounced positively in green and negatively in red. Also it should be noted that WRC unofficially updated guidance during their presentation last year (see our post on 1/15/09 titled “WRC: Got Transparency?”).  Also look out for SKX which preannounced 2 of the last 4 Mondays before the conference. We’re digging into the next step of this, which clearly is to drill down who will be on this year’s list. We’ve got some initial thoughts. Let us know if you care to discuss.


R3: ICR Pre-Announcement Season Roadmap - 1 



We are hosting a conference call on Friday,  January 8th  at 11AM (EST) to discuss our Top 10 Retail Predictable Unpredictables in 2010.  Simply put, these are 10 ideas that we assess at better than 60% chance of happening, but today's Wizards of Wall Street either: A) do not acknowledge that such ideas exist, OR B) see them as so unlikely, they do not bake them into their investment process.  Please contact or reply to this email to request dial-in information.





  • Both Saks and Bergdorfs are advertising post holiday clearance sales at 60% off. However, upon shopping the actual stores there is some merchandise being sold at even greater discounts. Given the backlash last year from the designer community, we suspect the stealth clearance is an effort to appease the vendor community. Second markdowns are still expected to take place later this week or early next week.
  • Meteorologists are suggesting that the recent cold wave that has hovered across most of the country (and is likely to continue) is shaping up to be like the “great winters” of the 60’s and 70’s. After a cold spell early in the Fall and then a warm stretch that followed, the unseasonably cold and consistent cold/snow combination is likely to leave inventory of outerwear and boots in a barren state. Of course, sales of early Spring and transitional apparel may also be put on hold…
  • With CES about to begin, the hype surrounding 3D television is reaching new heights. While the TV technology is likely to be costly and slow to hit the market, the industry may benefit from a major network’s effort to embrace the technology. ESPN announced it is launching ESPN 3D. The network will broadcast 85 live sporting events in 3D in 2010, including the Mexico-South Africa World Cup match in June. An additional 3D network is also expected to be created in a collaboration between Sony, Imax, and Discovery.




Disney Ups Retail Ante - Disney is creating a coast-to-coast retail sequel stretching from Southern California to Times Square. The Burbank, Calif.-based company is taking an interactive theme park-style approach to revamping its retail profile, and this year will open 20 doors featuring a new store design. Although details are under wraps, the tech-heavy retail concept will have elements reminiscent of Disney’s original Anaheim, Calif., theme park, and is designed as an interactive experience to lure young fans. About 340 stores, a combination of existing locations and new leases, will be launched in the next five years. An undisclosed Southern California space will be the first to bow, and renovations will begin soon on an estimated 25,000-square-foot space at 1540 Broadway, between 45th and 46th Streets, in Times Square. Disney’s first Times Square store closed in 2000. The new concept will feature an assortment of Disney products; interactive displays for children using Disney characters and themes (a “magic mirror” is one such element); theme park-style attractions like a “princess castle” in the store, and a children’s theater with customized viewing material, such as movie clips from Disney’s recent releases.  <>


Kohl's Enlarges N.Y. Design Office - Kohl’s Corp., intent on accelerating its private and exclusive brand strategy, is relocating and expanding its New York design office. The new location, at 1400 Broadway, is more than twice the size of Kohl’s existing design office at 1359 Broadway. The retailer plans to begin operating at 1400 Broadway in June. “We continue to differentiate Kohl’s through our exclusive partnerships and remain committed to bringing world-class brands to customers nationwide,” said Kevin Mansell, chairman, president and chief executive officer. “Having a New York presence has been instrumental in growing our exclusive and private brand strategy, which accounted for 45 percent of sales through the third quarter of this year, up over 2 percent compared with last year. The new location allows us to manage our existing brands and support anticipated growth as we continue to focus on growing market share.”  <>


Future Group: Value Retail Unit May Consider IPO - India's Future Group may look at options including an initial public offering if its discount store business needs to raise funds, the chief executive of its retail operations said Wednesday. "An IPO is a possibility," Rakesh Biyani told Dow Jones Newswires. "But there are no such plans now." Future Group operates Pantaloon Retail (India) Ltd., the country's largest listed retailer by market capitalization and ... <>


Report: Adidas' Reebok Turnaround on Track - Adidas AG may reach a "turnaround" for its Reebok brand as margins rise, Handelsblatt, the German business newspaper, reported, citing an interview with Reebok's head Uli Becker. New products such as its EasyTone toning collection are expected to improve profitability in the U.S. "Provided things continue like this we have reached the turnaround," Becker told the German newspaper in an interview. Becker didn't provide further details, according to Handelsblatt.   <>


Belk Bolsters E-Commerce Team - The Charlotte, N.C.-based department store chain said Tuesday that Jon Pollack, executive vice president of sales promotion and marketing, has been given additional responsibility for Belk’s e-commerce business. In another move, Ivy Chin, former vice president of strategic and multimedia operations for the home shopping network QVC Inc., has joined the company as senior vice president of e-commerce, reporting to Pollack. The promotion of Pollack also led to some changes within the merchandising area. David Neri, executive vice president and general merchandise manager of shoes and accessories, has added oversight for cosmetics, which reported to Pollack, and fine jewelry, which had been overseen by Kathy Bufano, president of merchandising and marketing. Pollack and Neri will continue to report to Bufano.  <>


M&S Sales Disappoint; Shares Drop Most Since October - Marks & Spencer Group Plc, the U.K.’s largest clothing retailer, reported a gain in holiday sales that some analysts said missed estimates and predicted that business conditions will “remain challenging” over the coming year. Marks fell as much as 5.4 percent in London trading, the most since October, after saying revenue at stores open at least a year rose 0.8 percent in the fiscal third quarter. The sales missed estimates, according to Morgan Stanley and Credit Suisse analysts, although Finance Director Ian Dyson said growth would have been 1 percent higher had the figures included the first day of the post-holiday clearance, as they did last year.  <>


Saks Hit With Unfair Labor Charge - A department store union filed an unfair labor practice charge against Saks Inc., following a move by the upscale retailer to eliminate 115 jobs in the cosmetics department of its Fifth Avenue store in New York at the end of this month. <>


Ski Market Files for Bankruptcy Protection - Ski Market, a retailer of outdoor products and winter sports gear with headquarters in Wellesley, MA, filed for Chapter 11 bankruptcy protection. In court documents, Ski Market's president and chief executive, Andrew Ferguson, said the company had been operating at a loss for several years and the economic downturn and its "negative impact on consumer spending during 2008 and 2009 exacerbated Ski Market's financial problems." Ski Market employs 170 full- and part-time employees in seven retail stores. Its website lists 16 locations, most of which have been shut down. According to its website, only 7 stores remain in operation. <>


Crocs General Counsel Resigns  - Erik Rebich resigned as vice president, general counsel and secretary of Crocs, Inc., effective Dec. 31. Effective Jan. 1, Daniel P. Hart, the company’s current executive vice president, administration and corporate development was appointed as executive vice president, chief legal and administrative officer and secretary of the company. <>


Wave of Store Closings Seen as Firms Reshape - As Macy’s Inc. on Tuesday revealed it’s shutting down five units over the next two months, there’s been growing speculation other chains will soon chime in with their own announcements of closures after digesting 2009 results and determining which units performed and which didn’t. The first quarter is usually when retailers streamline their fleets. However, the recession has underscored the nation’s overstored and overinventoried state. It’s testing retailers’ management skills, pushing them to rethink the future, strive for greater productivity and to make painful cuts across the board. Aside from closing stores, retailers have intensified negotiations with landlords over rent concessions, mitigating some downsizing. Last year, there were sharp reductions in head counts and merchandise orders, but not the tsunami of store closings that was expected.  <>


Consumer bankruptcies jump 32 percent in 2009 - Consumer bankruptcies in the United States soared 32 percent in 2009 from the year before, the American Bankruptcy Institute said Tuesday. The total filings -- 1.4 million -- is the highest since 2005, the same year that Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act. "A combination of economic stress, including high debt loads, rising unemployment and unsustainable mortgage burdens, left many consumers with little choice but to seek the financial relief of bankruptcy, ABI Executive Director Samuel J. Gerdano said in a statement. "As these strains continue for U.S. households, we expect that consumer filings will rise higher in 2010." Indeed, in December consumer bankruptcy filings rose 33 percent to 113,274 from 84,926 during the same month in 2008. <>


Asian Consumers Most Upbeat, American Sentiment Dips - Consumer confidence is strongest in emerging Asia, Brazil and Australia, but weakened slightly in the United States in the fourth quarter as Americans worried about job security, a survey showed on Wednesday. Consumer sentiment was highest in Indonesia, followed by India and Brazil, and was weakest in Japan and South Korea, according to the survey conducted by the New York-based Nielsen Company a month ago. Globally, the Nielsen Global Consumer Confidence Index averaged a reading of 87 points in the fourth quarter, little changed from the third quarter but 5 points higher than the second quarter. The U.S. reading dipped to 82 in the fourth quarter from 84 three months earlier, reflecting concern about rising unemployment and ranking U.S. confidence at 18th among the 29 markets surveyed worldwide. <>


China To End Subsidies On 'Famous Brands' Manufacturing - China has agreed to eliminate dozens of subsidies supporting the export of so-called "famous brands" in a move that U.S. Trade Representative (USTR) Ron Kirk says will  "level the playing field" for U.S. manufacturers of a wide range of products. The subsidies were the subject of a World Trade Organization (WTO) dispute initiated by the U.S. government in the face of what it believed were illegal subsidies under WTO rules. Kirk said the agreement is designed to resolve U.S. concerns raised in a WTO case the United States initiated in December 2008. He said the United States had challenged a Chinese industrial policy that generated a "vast number" of central, provisional and local government subsidies promoting increased worldwide recognition  and sales of famous brands for merchandise. <>


Paid search clicks and costs go up, search marketing firm says - Online shoppers clicked more often on paid search ads during the holiday season than a year earlier, and retailers paid more for those clicks, says search marketing firm NetElixir, based on a study of 32 retailer clients. Total clicks were up 11.0% from Nov. 1-Dec. 26 versus a year earlier, and cost per click increased 4.58%, says NetElixir. The study also found there were 10-12% more advertisers per keyword this year. The click-through rate also increased, to 9.8%, but consumers clicked more often before making a purchase, 6-8% more often on average, the search marketing firm says. The increase in total clicks was the big surprise, as NetElixir had projected only a 3-4% year-over-year increase in clicks for the holiday season, following a slow first half of 2009. “The jump in clicks bodes well for our industry,” says NetElixir CEO Udayan Bose.  <>


Shop price inflation rises in December - Shop inflation rose sharply in December to 2.2%, from 0.2% in November, according to the BRC Nielsen Shop Price Index. The passing of the first anniversary of the 15% VAT rate, effectively cutting its downward effect on inflation, was blamed for much of the rise. Non-food inflation rose to 1.4% from -1.2% in November, making the month the first for non-food inflation since December 2008. BRC director general Stephen Robertson said:  “With December being the first and only month where the 15% VAT rate was the same as a year earlier, a shop price inflation rise was inevitable.” The BRC said the return to a 17.5% VAT rate on January 1 would mean further upward pressure on inflation as comparisons are made against the lower rate of the corresponding period in 2009. <>


IRCE 2010 announces largest e-retailing conference agenda ever - The Internet Retailer Conference and Exhibition 2010 today announced the largest e-retailing conference agenda in the history of online selling. 91 conference sessions over four days—June 8 to 11 at Chicago’s McCormick Place West—will address topics of crucial interest as Internet retailing becomes more important than ever in the economic recovery. IRCE’s 175 speakers will address every major e-retailing strategy and practice and will weave their presentations into the theme of this year's agenda: "Time to Reboot: Recharging Your E-Commerce Business." Registration information for the conference is available at IRCE 2010 is also pleased to announce that the 2010 Keynote Speaker will be Imran Jooma, senior vice president and general manager of e-commerce, Sears Holdings Corp., the No. 2 online mass merchant and No. 7 online merchant overall.  <>


Even the players face disclosure requirements.



While not unexpected, Singapore’s newly released gaming regulations included fairly high hurdles for prospective junket operators.  What may be a surprise is that high rollers will also face disclosure requirements. 


We’ve long maintained that that the Singapore ramp may be slower than anticipated.  Junket operations already have a clientele.  The casinos themselves need to time to build a database.  From our conversations with junket operators over the last year it was pretty clear that given the likely regulations in Singapore, they wouldn’t even apply for licenses. 


Now, even the prospective high rollers will have to provide personal disclosures.  This is likely to negatively impact the VIP business as well.  Are the new regulations enough to kill the long-term viability of the market?  Probably not.  Over time, the operators will establish a strong high end business and benefit from an extremely low relative tax rate.  Moreover, if the regulations prove too onerous, the Singapore Government could make changes.  We believe the government desperately wants the projects to succeed.  After all, legalizing gaming in this conservative country was controversial from the start.  Success is now imperative.


However, our concern remains the speed of the ramp relative to expectations.  Indeed, we are projecting only $650 million in EBITDAR at LVS’s Marina Bay Sands in the first year of operations, below Street expectations and certainly company “guidance”.

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