I agree that the December existing home number is a statistical aberration, but that is not the point.  The issue remains that the current trend in joblessness is still a big drag on the economy and the government can’t prop up the housing market forever. 


Earlier today the NAR reported that sales of existing U.S. homes plunged almost 17% in December.  The decline was more than a Bloomberg survey and the biggest decline since records began in 1968.  The decline comes one month after a government tax credit was originally due to expire.  Congress extended the first-time buyer credit to cover deals signed by April 30, 2010 and closed by June 30 2010, and expanded it to include current homeowners.


What is clear from the December existing home number is that the original tax credit measure pulled sales forward.  The current program will have the same effect in 1H10, and sales will begin to fall off again in June 2010.


With Washington propping up the housing market it is nearly impossible to say with any certainty that the housing market is recovering.  As we said last week when the housing “starts” was reported, the government has put a floor under the housing market.  The “bottoming process” for housing will take time and future growth is dependent on job creation, not government stimulus measures. 


Howard Penney

Managing Director


HOUSING GONE WILD - ushomesales


Chinese Bubbles? Some Context...

Understanding that it’s now fashionable for consensus pundits to fancy themselves as professional Crash Callers is what it is. After missing making the call on the 2008 crash, it’s called career risk to miss the next one.


In an environment where Professional Bubble Watchers are in increasing supply, beware of calling something a bubble that’s already popped. Even though we are currently bearish on China for the intermediate term TREND (see our Macro Theme titled Chinese Ox In a Box), we are not superimposing this view across all longer term durations, yet…


Duration mismatch is a classic mistake that I (and plenty other short sellers) sometimes run into. In an industry where most bosses ask the same investment question (“what’s your best idea?”), there is a structural pressure locked into investors brains to be early with “new ideas.” However, the repeatable edge in this business resides in neither being too early, or staying too late.


Let’s assume for a minute that the Chinese make up all the numbers. But let’s also agree that, if they have been making them up the entire time, that everything is relative. The chart below shows real estate prices in 70 Chinese cities going back to 2006. This price data comprises of both residential and commercial real estate, allegedly…


What are some takeaways and questions from this chart?

  1. If there was a bubble in 2007, it already popped once
  2. If the current pace of y/y price growth is another bubble forming, its potentially locking in a lower-high (see the red line)
  3. The latest reading is a December number, and the Chinese have started to tighten much more aggressively here in January

Altogether, this morning’s December report was for real estate price growth of +7.8% year-over-year.


Is less than double digit price growth a bubble? Or are we still so scarred by having missed living through our own real estate bubble, that everyone else must be in a bubble? And that we are the only ones who can see theirs?


Too many questions without answers for a Monday.



Keith R. McCullough
Chief Executive Officer


Chinese Bubbles? Some Context...  - chihaus




Consistent with our views on China, the US is setting up to be in a difficult position in 2Q10, or what I’m calling BERNANKE’S BUBBLE.  Like our 1Q10 theme, “CHINESE OX IN A BOX”, Ben Bernanke is in a jam.


Right now China is tightening monetary policy as inflation accelerates and that is exactly what the US needs to do.  On January 13th, I outlined our “CHINESE OX IN A BOX” theme by saying, “Similar to our view that ‘HE WHO SEES NO BUBBLES’ (Bernanke) needs to remove his current unsustainable and unreasonable monetary policy of ‘extended and exceptional’, the People’s Bank of China has altered its policy verbiage from ‘appropriate increases’ in lending to ‘moderately loose’ monetary policy.” 


Slowing sequential growth, combined with accelerating sequential inflation, is now BERNANKE’S BUBBLE, and it is putting pressure on the S&P 500 for the intermediate term.


Slowing growth and accelerating inflation? Just look at the math:


1.       GDP growth will begin to decelerate in 1Q10 as the benefit of government stimulus begins to fade.  Current GDP growth estimates are 4.0% in 4Q09 and 2.7% in 1Q10.


2.       Consumer Price Inflation (CPI) and Producer Price Inflation (PPI) accelerated in December, up 2.7% and 4.4%, respectively, and both will continue to accelerate in 1H10.


As it stands now, the current 4Q09 GDP growth estimate of 4% reflects a range of estimates as high as 6.7% and as low as 1.5%.  Given that real, annualized quarterly GDP growth over the last 30 years has averaged 3.2%, the 4Q09 numbers are well above trend.   


If the consensus is right, then the 4Q09 GDP data point, which will be reported next Friday, will likely be bullish.  That being said, it is an indicator of trends in 4Q09 and is more likely reflective of a topping process as we are lapping a 5.4% decline from 4Q08 and significant government spending has allowed significant growth to the upside.  Going forward, GDP will likely moderate as implied by the 1Q10 GDP consensus estimate of 2.7%.


A number of sectors of the economy have bottomed out or are signaling a bottoming process (i.e. housing).  Adjusting for seasonal patterns, real retail sales are not improving and look more like housing.  Industrial production was up for the quarter, but without a subsequent increase in demand, this leads to increasing inventories.  The trade deficit and the contraction in employment are a small negative for GDP.  Regardless of how 4Q09 GPD comes in, it’s difficult to make the case that the U.S. economy is booming.  Instead, it looks like 4Q09 could be the peak.  Adjusting for “government stimulus measures,” GDP looks to be trend line flat.   


Therefore, the only factor that could conceivably support such strong growth in 4Q09 GDP is an extraordinary buildup in inventories, meaning that stronger production has not been matched by stronger consumption.  A sharp inventory buildup in 4Q09 would be consistent with a renewed slowdown in the first-quarter 2010, as inflation accelerates.


Growth decelerating at the same time inflation is accelerating suggest that BERNANKE’S BUBBLE needs to pop.


Howard Penney              

Managing Director




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%

Repetitive Consequences

“We hope that the weight of evidence in this book will give future policy makers and investors a bit more pause before next they declare, “This time is different.” It almost never is.”

-          Reinhart and Rogoff


We recently finished reading “This Time Is Different”, by Carmen Reinhart and Kenneth Rogoff, which provides “a quantitative history of financial crises in their various guises.”  We obviously found the book interesting on a number of levels. 


Firstly, both Keith and I worked at major private equity firms when the world was purportedly “awash” with liquidity.  Many of the world’s “great” financiers theorized that things were different that go around and were modeling company cash flows with no business cycles imbedded therein.   If we need any more evidence of this, it comes from Tishman Speyer Properties handing over Peter Cooper Village and Stuyvesant Town to their lenders this morning.  After closing the most expensive real estate purchase in history at the top of the real estate market, Tishman walked away today with its equity investment marked-to-market at zero.


Secondly, the book is an incredible resource for studying financial crises, particularly related to sovereign debt defaults.  Sovereign debt is a particular focus of our macro analysis this year given the massive amount of sovereign debt issuance piling up globally.  This is both an issue in the domestic United States, but around the globe as nations continue to issue debt to offset the budgetary issues related to the “Second Great Contraction”, as Reinhart and Rogoff refer to the global recession of 2008 / 2009.


The premise of the book is to look at historical financial crises and to attempt to quantify both what a crises is and what exogenous factors led to the crises.  If there is any lesson from the historical studies from the book, it is that crises are more normal than most market operators believe.  In fact, while we have been in a period of low sovereign debt defaults, over history this has not been the norm.  Typically a period of limited debt defaults is followed by a resurgence of default.   As Rogoff and Reinhart note in the preface to the book:


“If there is common theme to the vast range of crises we consider in this book, it is that excessive debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses greater systemic risks than it seems during a boom.  Infusions of cash can make a government look like it is providing greater growth to its economy than it is.”


Historical analysis is valuable because it can provide a range of outcomes for the future.   One of our Q1 Macro Themes is Chinese Ox in a Box, which refers to our belief that China will slow in Q1 of 2010.  Obviously, the most recent data from China already supports this thesis.  A key longer term question relates to the health of the Chinese banking system.  The bears are quite concerned, while the bulls continue to buy Chinese growth with little concern. 


The history of the Chinese banking system is less than stellar.  In fact, the last major crisis in Chinese banking occurred in the late 1990s.  As Reinhart and Rogoff write:


“China’s four large state owned banks, with 68% of banking system assets, were deemed insolvent.  Banking system nonperforming loans were estimated at 50%.” 


Another banking crisis of that magnitude may be solidly out on the TAIL in terms of probability, but we are pretty sure most China bulls aren’t even considering this in their scenario analysis for the Chinese stock market.  And certainly, this scenario is definitely not priced into Chinese stocks.  If Rogoff and Reinhart’s historical studies tell us anything, it is that history tends to repeat itself.  According to George Santayana:


“Those who cannot remember the past are condemned to repeat it.”






Daryl G. Jones
Managing Director


We now know that the improved trends in November were not a sign of a sustained recovery in casual dining demand.  Malcolm Knapp reported December same-store sales and traffic results of -4.9% and -5.4%, respectively.  Not only did trends fall off rather significantly on a 2-year average basis from November, but 2-year average same-store sales growth actually came in -7.2% with traffic down 8%, below December 2008 levels of -6.7% and -7.9%, respectively.


December was also the first month since April 2009 when comparable store sales growth came in better than traffic growth on a 1-year basis.  Malcolm attributed this 0.5% comparable sales outperformance to a lower level of discounting in December.  We know that weather was an issue in December, but decreased discounting may be largely responsible for the sequentially worse results during the month.  Brinker commented on its fiscal 2Q10 earnings call that it was phasing out its “3 Courses for $20 promotion,” which I said might be a little premature given the boost it has provided to traffic trends (EAT’s gap to Knapp widened to 1.7% on a 2-year average basis from 0.9% in the prior quarter).  Based on December trends, Brinker is not alone in its decision to decrease its reliance on discounting to drive guest counts, but the sequentially worse trends may signal that consumers have not recovered and are not yet willing to pay full price.  The industry has trained consumers to look for the best deals.

R3: Reversion to the Peak


January 25, 2009


Consensus margin assumptions for 2010 are lofty to say the least. The Street is looking for a return to peak by 2011. Here’s a scenario analysis that puts it in perspective.




We stated last week our increasing concern that Retail’s earnings revisions are slowing, while the consensus forward growth expectation has ramped to 25%, the market is placing a 19x P/E on such growth, and stocks are no longer going up on earnings beats. I’d be interested to have a discussion with anyone with an objective investment process that is not concerned by this.


We took the analysis a step further to see what margin expectations are really embedded in this group. In doing so, it’s pretty clear that the market assumes margins to revert to the mean for Retail in 2010, and to revert to historical peak in 2011. There are some quality companies that have been proactively investing in their models and will get there. But we think we’ll see a big diversion between the quality and junk this year.


At a minimum, here’s a matrix that allows you to make your own top line and margin assumptions which gives the resulting P/E based on current market prices.


R3: Reversion to the Peak - Table Valuation


R3: Reversion to the Peak - Industry Operating Margin Chart




  • After two and half years, import volumes at major retail ports increased by 1.7% in December.  Global Port Tracker, which monitors cargo volumes also estimates that year over year import growth will continue for at least the next 6 months.  December marked the first month in the last 28 that showed a positive increase.
  • Add Movie Gallery to the list of shrinking strip mall tenants.  There is speculation that the 2,700 unit movie rental chain is considering closing an additional 1,000 stores as part of a restructuring effort.  The chain, which had 4,600 stores at its peak in June 2007, may also be considering a Chapter 11 filing.
  • While the overall success of the Vancouver Winter Olympics my already be in doubt, there is one item that appears to be a big hit.  The officially-licensed $10 red and white mittens worn by torchbearers during the run up to the games are now the must-have item of the event. The mittens have sold almost 2 million pairs in advance of the opening ceremony or about 1 pair for each 34 Canadians.  For each sale, $4 of proceeds is donated to support the Canadian Olympic efforts.




Walmart to Cut 11,200 Sam’s Club Jobs, Outsource Demonstrations  -  Wal-Mart Stores Inc.’s Sam’s Club chain, the second-largest U.S. warehouse club, will cut about 11,200 jobs in the next month after hiring an outside company to take over in-store product demonstrations. About 10,000 demonstration employees, most part-time, will lose their jobs in the U.S. as marketing firm Shopper Events LLC takes over sampling, Sam’s Club Chief Executive Officer Brian Cornell said in an interview yesterday. The company also is cutting about 1,200 membership recruiting jobs. The hiring of Shopper Events, which already works for Walmart’s namesake stores, is part of an effort to improve demonstrations and lure customers from rival clubs, Cornell, 50, said. Sam’s, which trails Costco Wholesale Corp. in sales, will use savings from labor costs to improve the sampling of food, beverages, health items and electronics, the CEO said. “This was not a cost-cutting move,” he said. “We view it as an investment in building membership loyalty and attracting new members and ultimately fueling growth for Sam’s Club.”  <>


Chad Kessler Said Out at A&F - Abercrombie & Fitch Co., reeling from poor results, has dismissed its top ranking women’s merchant, Chad F. Kessler, according to sources. The company did not respond to requests for comment on Sunday. Kessler held the title of executive vice president of female merchandising and reported directly to Michael Jeffries, chairman and chief executive officer. He has been a key player at the specialty chain for a number of years, successfully rising up the ranks. Abercrombie has lately been outperformed by such youth specialty rivals as Aéropostale Inc., The Buckle Inc. and Hot Topic Inc. But the company, which operates Abercrombie & Fitch, abercrombie, Hollister and Gilly Hicks stores, is fighting back and trying to reconnect with consumers, including recently launching mobile commerce, advancing social networking initiatives and lowering prices. Kessler, who is in his mid-30s, has been executive vice president since November 2008. Before that he was senior vice president of female merchandising, prior to which he served as senior vice president and general merchandise manager of the Hollister division. <>


New Look to consider IPO at board meeting - New Look’s board will consider this week whether to go ahead with a Stock Exchange listing. Although the retail sector has been de-rated by the City in recent weeks an IPO is an option for New Look, people familiar with the situation told the Financial Times.

The retailer, which will also look at alternatives including a sale to another private equity firm, delivered strong Christmas sales and former Tesco director John Gildersleeve became its chairman this month.

Last year, New Look drafted in JP Morgan Cazenove, Deutsche Bank and Credit Suisse to advise on an IPO. The retailer could be valued at as much as £1.8bn. New Look said that a float is one option, but no decision has yet been made. <>


Salter Resigns as CEO of Hilco Consumer Capital - Jamie Salter has resigned as chief executive officer of Hilco Consumer Capital and Eric Kaup, general counsel at parent company Hilco Trading LLC, has been named interim ceo of the private equity firm. Kaup will continue as general counsel and executive vice president of Chicago-based Hilco Trading. Salter, who was said to have resigned over financial issues, cofounded Toronto-based Hilco Consumer Capital in 2006 with Hilco Trading. The firm invests in consumer product brands, and its investments include Polaroid, Sharper Image, Bombay Co., Ellen Tracy, Linens ‘N’ Things, Tommy Armour Golf and Halston. The company is also the exclusive adviser on licensing matters to the House of Marley. <>


Disney Store Taps Whitestone as VP, Marketing - Damon Whitestone was recently promoted to vice president of marketing at Disney Store North America, where he will lead global marketing initiatives, as well as the North American marketing strategy through in-store brand positioning, franchise and synergy development. Whitestone joined Disney more than 12 years ago and had most recently served as the company's head of marketing for Walt Disney Records. In that former role, he created artist development and marketing plans for Disney artists from Miley Cyrus and Hilary Duff to the Jonas Brothers, as well as also working with film properties, including Enchanted, The Princess and the Frog and Cars. <>


Designer Allie Yoko Launches Athletic Apparel Company: White Iguana Apparel - The mission statement of the company is to develop athletic apparel that provides superior comfort by utilizing sustainable organic bamboo and environmentally friendly business practices. White Iguana Apparel is designing and selling their own line consisting of mens leggings, womens leggings, hoodies, mens athletic shirts, and womens athletic shirts. Products are different from others because they claim to protect sensitive skin from the uncomfortable and chemically treated athletic apparel sold by other brands. To combat the trend of exporting jobs overseas, their athletic apparel is 100% made in the USA. <>


Finish Line Announces Nationwide Shoe Drive to Benefit Haitian Relief Efforts - Soles4Souls ( and Finish Line ( have joined forces to bring shoes to victims of the devastating earthquake in Haiti. Finish Line will help collect footwear to support Soles4Souls’ commitment to donate more than 1 million pairs of shoes to affected areas. Beginning January 22, customers at Finish Line will have the opportunity to drop off a gently worn pair of shoes. All donations will directly support relief efforts.  The retailer will also offer a $5 discount on a new pair of footwear with the donation of a gently worn pair, subject to certain terms and conditions. <>


Luxury Retailing: The Year Ahead - After a year of speculation about sell-offs and bankruptcies, the clouds in the luxury sector started to lift last November. Stores such as Bergdorf Goodman, Barneys New York and Saks Fifth Avenue have seen a slight uptick in sales, thanks to tourism, some pent-up domestic demand and the stock market holding steady. This year, the latest forecasts are for no major Chapter 11s to materialize, although it's anybody's guess whether deals will be struck. According to financial sources, they're more likely to be of a strategic character, rather than driven by private equity or real estate concerns. Luxury firms are all still managing under the duress of the tough economy, with significantly lower inventories, less dramatic markdowns, cash building up, reduced expenses and realistic expectations. They're also focusing more on accessories, cosmetics, shoes and contemporary sportswear, which continue to be among the busiest departments. Outlets are also perceived as an opportunity, with Saks Fifth Avenue, Neiman Marcus and Bloomingdale's among the retailers putting greater emphasis on the sector.  <>


FCC Launches Consumer Task Force - This week the Federal Communications Commission also said it will work to tighten restrictions on "robocalls" by telemarketers. The FCC has launched a consumer task force to investigate ways to safeguard consumer rights in the context of proliferating telecommunications networks and technologies. Armed with a Government Accountability Office report urging the FCC to tighten its consumer protection rules, FCC chairman Julius Genachowski said Joel Gurin, currently chief of the commission's Consumer and Governmental Affairs Bureau, will head the cross-agency Consumer Task Force. The new FCC unit will include every Commission bureau chief, the chief of the office of engineering and technology, the general counsel, and the managing director.  <>


Jury still out on whether barefoot running trend is beneficial - Running barefoot is as old as humanity. We ran barefoot for thousands of years before shoes were invented. But barefoot running has become more popular lately, due mainly to Christopher McDougall's best-selling book "Born to Run," which describes the barefoot-running Tarahumara tribe of Mexico and its mystical ultra-marathoning lifestyle. Though there weren't throngs of barefoot runners at last week's P.F. Chang's Rock 'n' Roll Arizona Marathon and  1/2 Marathon, more people are interested in barefoot coaching seminars and "barefoot"-like footwear. The trend can also be tied to a backlash against running-shoe companies that pile on ever-increasing and costly amounts of padding and gel while pulling favorite models off the market to encourage stockpiling. <>

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