I never had a policy; I have just tried to do my very best each and every day. 

~Abraham Lincoln


Some might say that the positive bias in the S&P 500 on Tuesday was driven by the dampened RISK AVERSION trade following some positive news regarding the European sovereign credit contagion.  Yesterday was really all about the FEEL GOOD trade.  With the Dollar index and the VIX comfortable above the TREND and TRADE and not doing much of anything yesterday, the 1.3% rise in the S&P 500 is all about the New Orleans Saints winning the super bowl (it just took a day to sink in.) 


Seeing Bourbon Street come alive last night was amazing to watch.  I have never watched a super bowl parade until yesterday.  Four years after being ravished from hurricane Katrina, New Orleans is back and is a small metaphor for the USA.  It makes you FEEL GOOD knowing that someday the US recovery story will be well grounded under the right leadership!  Unfortunately, it still feels like the USA is in training camp. 


Sovereign credit contagion concerns have been among the strongest macro headwinds facing the global markets over the last few weeks, and while there no explicit EU backstop for Greece, the market had a more positive tone on the belief that there will be.  To use the line that Jerry Maguire made famous and Drew Brees is thinking - “show me the money.”


Yesterday’s performance made you FEEL GOOD about the global RECOVERY trade.  While some of the more defensive leaning sectors such as Healthcare (XLV) and Utilities (XLU) lagged the market, the two best performing sectors are leveraged to a global recovery - The Materials (XLB) and Energy (XLE).  A sell-side upgrade of the Industrials (XLI), rounded out the three top performing sectors. 


The Materials (XLB) sector was the best performing sector yesterday, on the back of dollar weakness.  The Dollar index has now declined for the past two days, declining 0.55% yesterday.  The Hedgeye Risk Management models have levels for DXY at – buy Trade (79.48) and sell Trade (80.64).  Within the XLB the Steel and Ag chemicals names were some of the strongest performers. 


Yesterday, the Consumer Discretionary (XLY) was the second sector to turn positive on TREND.  Helping the XLY was the above-consensus January global comps from MCD and some fairly upbeat commentary on the retail space.  A headwind for the XLY yesterday was the Homebuilders.  The strength is the housing recovery story is government sponsored and that sponsorship will start to disappear in 2Q10.  We remain very cautious on the housing recovery story!


The two notable underperformers yesterday were Technology (XLK) and Financials (XLF).  The banking group was a slight laggard, with both money-center and regional’s underperforming.  Yesterday we shorted CIT.  Josh Steiner wrote a great research note on CIT Monday after the media got too excited about John Thain entering the building.  In short, the cost of capital is a major issue that will not go away anytime soon.


As we look at today’s set up the range for the S&P 500 is 36 points or 2.0% (1,048) downside and 0.74% (1,078) upside.  Equity futures are currently trading above fair value, rallying on news Germany said to consider Greek aid beyond loan guarantees.  News about Europe (or Germany) offering Greece some life support continues to be a significant driver of the RISK AVERSION trade.  I still FEEL GOOD that the party in New Orleans will continue into Mardi gras next week.   The Hedgeye Risk Management models have the following levels for VIX – buy Trade (24.30) and Sell Trade (28.12). 


Copper is trading higher for a third day as January imports by China rebounded from last year.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.81) and Sell Trade (3.14).


The correlation for gold continues - gold is trading higher on the back of a weaker dollar.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,047) and Sell Trade (1,111).


The American Petroleum Institute reported that crude inventories rose to the highest since October last year and gasoline supplies reached the highest since March 1999.  Currently Oil is trading up slightly on the day!  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (70.02) and Sell Trade (77.27).


Howard Penney

Managing Director














VFC: Right for the Wrong Reasons

VFC likely has enough gas in the tank to make numbers on Thursday, but we think that the consensus is right for the wrong reasons. We are in line with the street at $1.46 for Q4, and would not be surprised to see a beat (in typical VFC style). Next year they HAVE TO do a deal in order to hit estimates, which they are likely to do. Both forward trends and yy compares look decent for 2 quarters until then. These guys are wizards at financially engineering their way out of a negative growth scenario, and managing expectations accordingly. I don’t have any ammo to suggest that this will break fundamentally.


Revenue: Should print a flat to slightly down top line vs. a -2.2% last year. Then they go up against a -6.5% and -11.4% in 1Q and 2Q, respectively. This happens at the same time a 3-5% FX drag turns into a 2-3% tailwind.  Also, VFC has accelerated store growth and added almost 90 retail stores over the past 4 quarters, which naturally boosts sales as mix shifts to fully captured-retail sales instead of shared wholesale. Putting it into numbers, VFC grosses about 1.5mm annually per store, with about $400k in the fourth quarter. All said, we’re looking at a 1.5%-2% boost in revenue simply from the addition of VFC retail. So we’re looking at a boost from retail and FX and even a point in growth from acquisitions – which is in consensus numbers.  I’m not sure that the consensus knows why it’s right. But that might not matter.


Margins: Gross Margin compares are easy in 4Q and ridiculously easy in 1Q. And yes, both retail and FX will start to help. The consensus numbers only have a 1pt GM rebound in 1Q – even though they face a -3pt compare vs. last yr. Considering how FX was blamed for a good portion of 1H 08’s declines, it alone should get them a point in recovery. As guided, nothing major on SG&A, though higher retail costs will pinch a bit. I actually like how they’ve been investing in SG&A despite downturn over past 6 quarters. This makes them either careless, or good, proactive managers. They’re the latter.


Balance Sheet/Cash Flow: Inventories have been tight in 2009 and should continue in Q4 and 2010. Capex coming down this year to 1.5% of sales. Good near term. But can’t go any lower. It will need t go up next year, which will pinch cash flow later in the year. For now it’s a wash.


VFC: Right for the Wrong Reasons - 1


VFC: Right for the Wrong Reasons - 2


VFC: Right for the Wrong Reasons - 4

Good Old Germany

Position: Long Germany via the etf EWG


We got a bullish report on German imports and exports today for the month of December, with exports up 3% and imports +4.5% versus the previous month. Importantly for the export-heavy economy (exports account for ~ 40% of GDP), December’s reading could suggest an improving trend in 2010. With 5% contraction in German GDP last year and a 18.4% downturn in exports and 17.4% contraction in imports, compares will be easier in 2010.


While we still expect mild growth this year for Germany (and much of the Eurozone), the recent heightened market volatility in Europe over the PIGS affirms our view in owning a lower beta play and countries with “sound” balance sheets.  Although Germany, with a budget deficit that may swell to 5.5% of GDP, exceeds the Eurozone’s 3% limit, it’s a far cry from the 10-13% levels of the PIGS and double that of the USA.


Additionally, we’ve had our Hedgeyes on German inflation and employment, both of which have remained resilient over the last months since Germany returned to growth quarter-over-quarter in Q2 ’09.  CPI was up 0.8% in January Y/Y, in line with the Eurozone average of 0.9%. And while we haven’t ruled out a gain in unemployment over the intermediate term, which currently stands at 8.2%, we’d expect the government extension of subsidized short-time employment to mute significant gains. Stay tuned.


Matthew Hedrick


Good Old Germany - tradege


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The Federal Reserve Senior Loan Officer Survey came out on Feb 1. There was no material change in trend from the last few surveys. That said, this survey did mark an inflection point of sorts in that the net percentage of banks tightening vs. last period was actually zero (for C&I loans). In other words, on average, banks have finally stopped tightening their lending standards on C&I. The following chart demonstrates. For reference, the chart shows a blend of the large, medium and small bank survey data.




The below chart looks back to 1992 and 2003 as the prior two instances when the banks stopped net tightening. Financials traded higher over the two-year periods following the point at which banks stopped tightening. However, we should point out that in both 1992 and 2003 Financials were relatively range-bound for the first 4-5 months thereafter, for the most part staying within a +/- 5% band. We use an equal-weighted basket of 20 mid-cap and large-cap banks that traded back to 1990 for our benchmark.




Banks are still tightening in some asset classes, however, such as CRE loans. The following chart shows that 30% of banks put the brakes even harder this quarter on the CRE front. That said, the trend clearly shows we're closer to the bottom than the top on CRE - an important read through to credit quality for the regional banks.




At the consumer level, banks continue to tighten on residential real estate loans.




Meanwhile, consumer demand for mortgage loans fell materially in the fourth quarter. The increase in prime residential mortgage loan demand dropped from +28% to -8% linked quarter, while the change in demand for nontraditional mortgages fell from -4% to -35%. Subprime data hasn't been recorded for 4 quarters now.




What we find really interesting is the fact that banks are now finally more willing to lend, but consumers are pulling back at a growing rate, even as unemployment is leveling off and starting to decline.




Conclusion. We think the conclusions are four-fold. First, Financials have historically risen in the wake of banks reaching the zero-line with respect to net tightening on C&I loans. The caveat is that they haven't done much for the first 4-5 months of that two-year period, which would correspond to Feb 2010 - June 2010. Second, commercial real estate tightening, while still underway, has fallen from 87% to 27% in the last 5 quarters in, more or less, a straight line. We think this bodes positively for regional banks with CRE exposure. Third, residential mortgage loan demand dropped in both the prime and nontraditional categories. We think this bodes poorly for future home price trends. Fourth, demand for non-mortgage consumer loans continues to drop at an increasing rate in spite of banks actually now easing their standards for such loans. This tells us that the consumer's demand for incremental credit continues to abate - a near-term negative for lenders, but probably a long-term positive for the country.


Joshua Steiner, CFA


GIL: Poised for Another Good Quarter

Gildan reports after the close today and looks poised for another beat with upside likely to continue over the next 1-2 quarters. Interestingly, this synchs fairly well with HBI. Though they are both perceived to be fairly similar from a business standpoint, their earnings trajectories over the past 3 years have been on different paths. For the next 2 quarters, they are both setting up to post solid results, but sustained intermediate-term outperformance will require the consumer to show up 3 quarters out as an offset to elevated commodity prices. As a reminder, GIL is far more exposed to cotton than HBI (~33% of COGS for GIL vs. ~6% for HBI).


Here’s a detailed look at the puts and takes for the quarter along with management’s prior outlook for 2010 from their Q4 conference call:


GIL: Poised for Another Good Quarter - GIL Q1Table2 2 10

GIL: Poised for Another Good Quarter - GIL Q1Table 2 10



F10 Outlook from 4Q Call:


Revs in excess of $1.2Bn (17%+)

  • Activewear unit growth ~25%
    • Will bring sales volume close to existing capacity
    • Assuming no industry growth
    • Continued penetration in Int'l mkts
    • Incl. new programs for underwear $70mm
      • mgmt commented could be conservative (is the minimum required sales for space they attained)
  • Sock unit growth ~5%
  • Approx. 5% decline in ASPs
  • Have several other programs in the hopper that could drive upside to topline

GMs: ~26% (impacted by promos & discounting)

  • cotton and energy costs for the first half of fiscal 2010 are expected to be materially lower than the first half of fiscal 2009 but are expected to increase in the second half of the fiscal year and to be higher than the second half of fiscal 2009

SG&A: ~11%-11.5% going forward (closer to 11.5% in F10)

CapEx ~$130mm (up from $45mm in F09)

  • Supporting retail strategy
  • Completion of Rio Nance 4 sock facility
  • Purchase of new office building in Barbados




If the rumors that Starbuck’s is testing or launching pour-over brew method equipment are true, it would signify a move back toward its coffee-house roots and providing customers with a fresh cup of coffee.  Suggestions include that the “pour over” launch could happen in approximately one month and that Starbucks will launch the “pour over” method in all non-Clover stores.  According to a blog on, the two “mercantile” non-branded Starbucks are already using the “pour over” as one of their main methods of brewing coffee.


Some are suggesting that this change could test baristas’ capacity and customers’ patience.  Either way, it shows a continuation of Starbuck’s policy of engendering a coffee-house feel for its customers.


I’m sitting in a Starbucks as I write and the Barista confirmed that the “pour over” method will be launched in a month.  Business continues to be very healthy for Starbucks.






Howard Penney

Managing Director

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