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R3: FL: #1 on Strategic Wish List...Check


January 11, 2009


With the first of our strategic wish list initiatives for Foot Locker announced Friday, don't be surprised to see some combination of the remaining strategies announced when the company reports 4Q results. We continue to warming to the name as a big idea in 2010.





Back on December 17th we posted our “Wish List” of strategic moves that we'd like to see Foot Locker execute to positively fix the business under the new leadership of Ken Hicks. The first bullet highlighted right-sizing the store base and optimizing the portfolio by brand. After Friday's announcement that it expects to close 120 net stores in Q4 and will begin consolidating elements of the Lady Foot Looker and Kids Foot Locker concepts we can check off #1 on the strategic wish list.


With a 30+ point margin spread between the least profitable and most profitable stores, this is a key point to enhancing long-term profitability. Additionally, with 1.7 Lady Foot Lookers for every Kids Foot Looker the opportunity to right-size the Lady portfolio appears compelling (see our "FL: Close 'Em or Suffer" on 1/6 for more detail).  


So what’s next? Hicks is expected to unveil his plan in the Spring, with the reporting of 4Q results. We won’t be surprised when some combination of the remaining "Wish List" strategies will be employed to begin the turnaround. Neither should you. The question here is not what ideas will be communicated but rather if and how well they can be executed. We continue warming to the name and suggest now is the time to dust off the old file for what could be one of our key names in 2010. 




  •  In an effort to recapture women’s interest, Sperry Top-Sider has officially succeeded with an Authentic Original 2-Eye boat shoe designed and sold through exclusively through J. Crew…in platinum gold. The shoe has completely sold out and is now on backorder until March at the earliest (just try ordering online!). While the financial benefit is likely to be muted with shoes already out of stock, the value from a branding perspective should not be understated with Sperry now one of the hottest trends at one of the most relevant fashion retailers.
  •  With the Retail Big Show kicking off this morning in NYC, a rather startling fact is the number of retailers registering for the show this year up 27% over last year. I think we can safely state this increase is not demand driven, but I suspect it's symptomatic of the recent wave of new designers entering the market following the extinction of many storied and tired brands/designers over the past year.
  • After saying relatively under the radar, the court case between VFC and The South Butt has become higher profile after the defending company called for dismissal last week. Brand protection has to be respected, however, there is a point at which it's just silly...this is one such example. The exposure from this case is arguably more detrimental to the TNF brand than had they just gone about their business. That said, the company's been looking for an acquisition for a while now, why not buy out the 2-year old bootstrap operation and call it a day.




Iconix Sues Merrill Lynch - Iconix Brand Group Inc. filed a lawsuit against Merrill Lynch, Pierce, Fenner & Smith Inc. on Thursday accusing the financial adviser of fraud over the sale of $13 million in devalued auction rate securities. Iconix engaged Merrill as a financial adviser in 2006 as the fashion group began to acquire its portfolio of home and apparel brands. In its complaint, filed in a Manhattan federal court, the company said its adviser encouraged it to invest in auction rate securities as part of its capital management plan. Lawyers for Iconix wrote that Merrill represented the securities to be safe and highly liquid. Auction rate securities, or ARS, are long-term interest-bearing instruments of varying credit risk traded at auctions where their interest rates are reset. Prior to the subprime mortgage crisis, they were attractive to some investors who could ideally liquidate them at such auctions, which usually occurred weekly, biweekly or monthly.  <wwd.com>


La Go Go’s Growth Shows China Consumer Spending Power - Beijing office worker Wang Hong holds up a $44 black blouse at Chinese clothing store La Go Go and smiles. “It’s like getting a foreign brand at local prices,” said the 33-year-old Wang, standing in front of racks of clothes at the Jiamao mall. By offering prices as much as 25 percent less than international retailers Esprit and Mango, La Go Go parent Ever- Glory International Group Inc. is transforming itself from a supplier to Levi Strauss & Co. into a Chinese fashion chain. The retail unit’s sales climbed 153 percent in the third quarter from a year earlier. Ever-Glory chairman Edward Kang started La Go Go stores in 2008 to capitalize on rising local affluence and counter a drop in exports. The Nanjing-based company now has 154 La Go Go outlets and plans to open as many as 1,000 by 2015.  <bloomberg.com>


Prada Said Tapping François Kress as U.S. Chief - The company is about to name François Kress president and chief executive officer of New York-based Prada USA, according to a source familiar with the situation. Kress, the former managing director of Bulgari’s jewelry, watch and accessories division, will replace Graziano de Boni, who left Prada in late October to head up the newly formed Reed Krakoff division at Coach Inc. Kress left Bulgari in September. Until Kress’ appointment, which is said to be effective today, Prada SpA chief operating officer Sebastian Suhl had taken on the additional responsibilities for the U.S. Prada could not be reached for comment. <wwd.com>


Kellwood Acquires ISIS - Kellwood Co. on Friday closed on its acquisition of ISIS, a women’s outdoor performance and casual apparel firm. Terms of the deal were not disclosed, except that the acquisition was completed through Kellwood’s American Recreation Products subsidiary. Sources familiar with the transaction said Kellwood’s owner, private investment firm Sun Capital Partners Inc., provided monetary assistance for the purchase of ISIS. “We’re pleased to have ISIS as part of the Kellwood group of brands, and we look forward to announcing more acquisitions throughout 2010,” said Michael W. Kramer, president and chief executive officer of Kellwood. Kramer said last month the firm was on the hunt for more acquisitions, and has been in deep discussions with several firms about possible purchases.  <wwd.com>


Jhane Barnes Sells Stake to AW Chang - After months of searching for new business partners, Jhane Barnes has struck a deal with AW Chang Corp., which has acquired a 50 percent stake in the business. Terms were not disclosed. Under the partnership, AW Chang will manufacture and market Jhane Barnes collection sportswear, neckwear, dress shirts and hosiery through its men’s apparel division, Excalibur, a vertically integrated company that produces neckwear and dress shirts under license; Barnes will continue to head design. The business will now be known as Jhane Barnes Collection. The deal ends a period of uncertainty for the company, which had been looking to restructure since early last year. Over the summer, Barnes said she was looking for stakeholders, and was considering bids from two different parties. At that time, Excalibur was named as the licensee for Jhane Barnes neckwear and ties. “But we soon learned that our company had the financial, sourcing and manufacturing capabilities to give Jhane what she needed,” said Warren Katz, president of both the new Jhane Barnes Collection and Excalibur.  <wwd.com>


A new e-reader will give Borders.com’s new e-book store top billing - Spring Design’s Alex e-reader, which will launch Feb. 22, will prominently feature Borders Group Inc.’s new e-book store when the site launches in the second quarter, the companies announced. Although shoppers will be able to buy and read books from the entire Internet, Borders.com will receive top billing on the e-reader as it will appear on its initial screen, says a Borders spokeswoman. The Alex e-reader device enables users to download any book or document that conforms to the ePub format using Adobe Inc.’s anticopying DRM software—a combination gaining support among many e-book sellers apart from Amazon.com Inc., which uses its own format developed for its Kindle e-book reader. The Alex reader can also display content in .txt or HTML formats. <internetretailer.com>


Apparel Retailers Cut Jobs - Apparel retailers across the country cut 5,900 jobs in December, reversing gains reported in November as stores hired extra help for the holidays. In the height of the holiday season, department stores cut 5,600 positions to employ 1.51 million people, while specialty stores eliminated 300 jobs to employ 1.42 million, the Labor Department said Friday. Declining employment levels at stores in December “tells us retailers were very cautious about the holiday season,” said John Lonski, chief economist for Moody’s Investor Services. “The continued weakness of the labor market warns against expecting more upside surprises for consumer spending.” As long as the labor market stays slack, the better-than-expected holiday comparable-store sales results reported Thursday are no guarantee consumer spending will make a robust recovery in early 2010, Lonski said. The job situation is more likely to show signs of improving in the spring, he said. <wwd.com>


China Exports Rise 17.7 Percent - Reversing a 13-month pattern of decline, China’s exports rebounded and rose 17.7 percent in December, lending weight to conventional wisdom that its economy has recovered from the global downturn. Yet economists cautioned that much of China’s recovery has come on the back of a massive government spending plan that sought to pour $586 billion into economic development, primarily through creating new infrastructure like roads and railways. “We are seeing good signs in the new data, especially for December,” said He Weiwen, a Beijing-based trade analyst with the World Trade Union. Figures released Sunday by China’s General Administration of Customs showed imports in December surged by 55.9 percent over the previous December. In all, China’s exports for 2009 declined by 16 percent to $1.2 billion, while imports fell by $1 billion, or 11 percent. China’s contentious trade surplus shrank significantly last year, contracting by 34 percent to a total of $196 billion.  <wwd.com>


E-commerce deal-making picked up in the fourth quarter - Merger and acquisition activity rose significantly in the fourth quarter among digital media companies, led by increased action in e-commerce companies, says the latest Deal Notes report from investment banker Petsky Prunier. The digital media segment also includes comparison shopping, social media, local search and classified sites as well as shopping portals. Investors in that segment completed 54 deals in Q4 2008 with a value of about $2.0 billion compared to 50 deals worth $1.15 billion in the same period a year earlier. The dollar value of deals jumped 74% compared to Q4 a year ago while the total number of deals was up 8%. E-commerce was the most active digital media subsegment, with 17 transactions valued at $784 million.

The second-most active segment was interactive advertising, which includes interactive agencies, ad networks, digital video, mobile advertising, e-mail services, and search engine marketing and optimization companies, as well as affiliate networks, with 47 transactions worth $1.2 billion.  <internetretailer.com>

Traversing Peaks

"In the mountains, the shortest way is from peak to peak: but for that you must have long legs.”
-Friedrich Nietzsche
After the most expedited US stock market rally in modern history, how are we going to come off of this immediate term peak? When? Why? These are the questions boggling the minds of plenty a Depressionista.
With the SP500 hitting another higher-high on Friday at 1144, this mountainous peak is +69.2% above the March 9th low. Luckily, we got long US Tech and Healthcare again (XLK and XLV) ahead of the latest leg of the rally. The SP500 has not had a down day yet for 2010!
I’ve been to these mountains of hope before. While hope is not an investment process, not respecting that it drives many of the minds who chase price momentum isn’t a risk management process either.
There was a time when I thought my short little legs could hop from peak to peak, without getting pricked. That was the mentality of a boy born in the tech bubble. Today, I’m simply a battle scarred man of bubbles. While I may have seen one coming in gold and US Treasuries, I do not see one here just yet in US stocks.
When my risk management process signals a peak, the first thing I do is wait. Peaks are processes, not points. You need to let them bathe in the sunlight of hope at the same time as the un-experienced climbers of the wall of worry fall on their swords. Peaks are patient. Peaks take their time.
Across all 3 of the durations in my risk management model, the US stock market remains in what we Hedgeye knights call a Bullish Formation.
A Bullish Formation is when the immediate term TRADE (3 weeks or less) underpins the intermediate term TREND (3 months or more) and the long term TAIL (3 years or less).
For the SP500, those 3 lines of support are currently as follows:
1.      TRADE = 1115

2.      TREND = 1087

3.      TAIL = 956

What the astute risk manager will immediately recognize from these levels is that they are -2.5% (TRADE), -5% (TREND), and -16.5% (TAIL), lower than the current SP500 closing price of 1144. If you are fully invested or levered long up at this market price, that’s your risk.
Provided that these 3 lines of support hold, we remain in a Bullish Formation. As you might suspect, all Bullish Formations do is frustrate short sellers. They tend to perpetuate a series of higher-lows and higher-highs. If you are net short this market price, that’s your risk.
I measure the risk that we pull back to my lines of support every 90 minutes of marked-to-market trading. I measure ranges, spreads, and deltas. I effectively risk manage within a band of probabilities. If you don’t manage risk like this, real-time, that’s your risk.
Peaks, valleys, and the market prices embedded therein, wait for no one. They frustrate us. They fascinate us. They are patient and, sometimes, unkind.
This morning’s setup I am measuring more risk than reward in buying US stocks. I have immediate term upside to the 1149 level (up +0.4%). I have Immediate term downside support at the 1132 level (down -1%).
My plan isn’t that complicated; but I stick to it, with one very important caveat – the plan is that the plan changes as market data and prices do. I’m not bullish this morning. I’m not bearish. I’m simply tasked with calling out these levels and probabilities as they are, and managing risk around them.
In summary, what I am saying this morning is that if my immediate term level of 1132 breaks, the market has a higher probability of sucking back to its immediate term TRADE line of 1115. If 1132 holds, there is a higher probability that we see 1149.
That’s the gravitational force of the math in my macro model. It doesn’t always work, but it definitely helps guide me as I attempt to traverse potential market peaks.
Best of luck out there today,

XLK – SPDR Technology
Buying back Tech after a healthy 2-day pullback. Next to Healthcare, this remains our favorite sector in the SP500.

UUP – PowerShares US Dollar Index Fund
We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

XLV – SPDR HealthcareBuying back the bullish position Tom Tobin and his team maintain on the intermediate TREND term for the Healthcare sector.

VXX - iPath S&P500 Volatility
The VIX broke down to our immediate term oversold line on 1/6/10 and the II Bullish/Bearish survey is far too complacent, prompting us to add to our position on VXX.

EWG - iShares GermanyBuying back the bullish intermediate term TREND thesis Matt Hedrick maintains on Germany. We are short Russia and, from a European exposure perspective, like being long the lower beta DAX against the higher beta RTSI as well.

EWZ - iShares Brazil
As Greece and Dubai were blowing up, we took our Asset Allocation on International Equities to zero.  On 12/8/09 we started buying back exposure via our favorite country, Brazil, with the etf trading down on the day. We remain bullish on Brazil's commodity complex and believe the country's management of its interest rate policy has promoted stimulus.

CYB - WisdomTree Dreyfus Chinese Yuan The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP - iShares TIPS The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are currently mispriced and that TIPS are a efficient way to own yield on an inflation protected basis, especially in the context of our re-flation thesis.


As the gold price inches up toward the immediate term resistance line of $1137/oz, we’re going to take the other side of a long-standing bullish position.

RSX – Market Vectors Russia
We shorted Russia on 12/18/09 after a terrible unemployment report and an intermediate term TREND view of oil’s price that’s bearish.

EWJ - iShares JapanWhile a sweeping victory for the Democratic Party of Japan has ended over 50 years of rule by the LDP bringing some hope to voters; the new leadership  appears, if anything, to have a less developed recovery plan than their predecessors. We view Japan as something of a Ponzi Economy -with a population maintaining very high savings rate whose nest eggs allow the government to borrow at ultra low interest levels in order to execute stimulus programs designed to encourage people to save less. This cycle of internal public debt accumulation (now hovering at close to 200% of GDP) is anchored to a vicious demographic curve that leaves the Japanese economy in the long-term position of a man treading water with a bowling ball in his hands.

XLY - SPDR Consumer Discretionary We shorted Howard Penney's view on Consumer Discretionary stocks on 10/30/09 and 12/2/09.

SHY - iShares 1-3 Year Treasury Bonds
If you pull up a three year chart of 2-Year Treasuries you'll see the massive macro Trend of interest rates starting to move in the opposite direction. We call this chart the "Queen Mary" and its new-found positive slope means that America's cost of capital will start to go up, implying that access to capital will tighten. Yields are going to continue to make higher-highs and higher lows until consensus gets realistic.

US STRATEGY – The RECOVERY trade is in

While a worse-than-expected 85,000 decline in December nonfarm payrolls weighed briefly on recovery expectations, the S&P finished higher by 0.29% on Friday, closing up 2.68% for the week.  Volume declined 16% day over day, so the move on Friday was less convincing; breadth was also week on the day. 


ON the MACRO front, nonfarm payrolls fell 85,000 in December vs. consensus expectations for an unchanged reading.  However, November payrolls were revised to reflect a 4K gain vs. an originally reported decline of 11K. As expected, the unemployment rate held steady at 10% (largely due to a drop in the participation rate), while the 0.2% gain in average hourly earnings was also in line with the consensus. In general there were not many good things payroll to report.


On Friday the Financials (XLF) were the worst performing sector after rallying sharply for the balance of the week.  The banking group (BKX) fell for the first time on Friday, declining (0.2%).  The weaker-than-expected December employment report may have spurred some profit-taking in the XLF. 


Despite some weakness in the dollar the CRB was basically unchanged on the day.  The cold weather helped Orange Juice move up 7%, followed by Copper up 2.1%, Silver up 1.6% and Gold up 1.6%. 


The best performing sector was the Industrial (XLI), rising 1.6% on the day.  The RECOVERY trade got a lift from upwardly revised Q4 guidance from UPS +4.8%, and continued strength in recovery-leveraged pockets of the market such as steel, aluminum, copper, machinery and multi-industry/conglomerate stocks - GE was up 9.7% last week. 


The dampened risk aversion trade was evidenced by last week’s move in the VIX.  The VIX declined 4.7% on Friday and declined every day last week (the S&P 500 was up every day last week); and a bullish steepening move in Treasuries reflecting a pushback in tightening expectations.


The Technology (XLF) sector snapped a three-day losing streak on Friday, although the move was without much fanfare.  The semis were among the best performers with the SOX +1.5%.  Additionally, the memory names resumed their upside trajectory with SNDK up 2.5% and MU up 2.4%. 


The range for the S&P 500 is 17 points or 0.4% (1,149) upside and 1.0% (1,132) downside.  At the time of writing the major market futures are trading slightly higher.    


In early trading today Copper climbed for the first time in two days as a surge in Chinese imports boosted optimism that a global economic revival is under way.   The Research Edge Quant models have the following levels for COPPER – buy Trade (3.38) and Sell Trade (3.50).


In early trading today Gold is up for the second day in a row on the back of a weak dollar.  The Research Edge Quant models have the following levels for GOLD – buy Trade (1,115) and Sell Trade (1,156).


In early trading Crude oil is trading up 1% to $83.56 a barrel.  Last week oil rose 4.2% and has been up for 4 weeks in a row.  The Research Edge Quant models have the following levels for OIL – buy Trade (80.91) and Sell Trade (84.34).


Howard Penney

Managing Director


US STRATEGY – The RECOVERY trade is in - sp1


US STRATEGY – The RECOVERY trade is in - usdx2


US STRATEGY – The RECOVERY trade is in - vix3


US STRATEGY – The RECOVERY trade is in - oil4


US STRATEGY – The RECOVERY trade is in - gold5


US STRATEGY – The RECOVERY trade is in - copper6


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Wynn Macau's market share gain and overall growth in December was impressive. New junkets and higher direct play contributed to the upside.



Wynn Macau generated approximately $5.2 billion in VIP junket rolling chip volume in December of 2010, up 71% over December 2009.  This is a staggering number for one property and is the second highest month ever recorded by Wynn slightly behind only May of 2008.  And that's not all of it.  Wynn's house junket contributed another estimated $600 million in turnover.


Hold percentage was somewhat higher than last year, but not by much.  We also estimate that Wynn's direct play generated significant growth over last year.  Total VIP revenue (including the house junket) increased 85%.  Total VIP market share climbed a whopping 570 bps from November to 18.7%, while Wynn's overall market share (including Mass) grew to 16.5% from 12%.




So in addition to higher direct play, what drove the increase?  During December, Wynn Macau had 10 junket rooms at the property, operated by 9 different junkets (including Wynn's house junket).  Apparently, two of the newer operators moved quite a bit of business over from Starworld and some smaller Macau casinos.  Indeed, Starworld's VIP rolling chip market share declined 170 bps, Galaxy in total fell 140 bps, and SJM in total fell 170 bps.  Meanwhile, Wynn's two largest junkets maintained the current book of business at around $1.3 billion each.


Is the move sustainable?  Maybe, November also showed a marked sequential increase in VIP chips share, up 260 bps.  November stopped a fairly consistent share degredation following the 2009 peak in May. 

The Week Ahead

The Economic Data calendar for the week of the 11th of January through the 15th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - wkk1ab

The Week Ahead - wk1b


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