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Dirty Deficit

Position: Short the UK via the etf EWU


We wrote a note yesterday titled “Exceptional Uncertainty” to discuss recent (lagging) macro data points that further confirm our bearish view on the UK economy. Today, we received the UK’s January Net Borrowing figure, which at 4.3 Billion Pounds is a notable bearish call-out as it is the first time since 1993 that Great Britain has recorded a deficit for the month of January. 


David Kern, Chief Economist at the British Chamber of Commerce, said: “The worst than expected January figures further emphasize the dangers facing Britain’s international credit rating. The public finances are always in surplus in January due to large seasonal tax revenue, but the deficit this year reinforces the need for credible and specific deficit-cutting measures in the next month’s budget.”


While we agree with Kern’s latter point that deficit-cutting measures are needed NOW, the heightened political environment between the Conservatives and Labour with an election to be called before June will include more talk than detailed action, which should only prolong the country’s economic underperformance.   


We shorted the UK via the etf EWU in our model portfolio yesterday. Below we’ve noted our TREND (3 months or more) level of resistance for EWU.


Matthew Hedrick


Dirty Deficit - EWU


R3: WMT: Execution-Mart


February 18, 2010


WMT’s  triangulation of sales, gross margins and inventory is as good as it’s been this cycle, and now we start to anniversary tougher numbers. Management’s tone shift towards execution could not come at a better time.





Last week we took a look at Wal-Mart in some detail (see our note from 2/11) and walked away with the conclusion that shares are likely range bound.  Our viewpoint stemmed from the fact that Wal-Mart’s fundamental results are likely to remain incredibly consistent, but also contained to a narrow range of outcomes.  Today’s 4Q results further confirm to us that there is little opportunity for a major breakout on the horizon.  However, it is notable to point out that management’s tone is very upbeat on margins and expense control, while at the same time decidedly less upbeat on sales.   2010 appears to be setting up as an execution story, one in which results will not be entirely dependent on a consumer recovery or a meaningful topline acceleration.  Let’s look at the quarter:


WMT came in five cents above the high end of guidance ($1.17 vs. $1.08-$1.12, Street was at $1.12), driven primarily by solid expense control, gross margin expansion, and strong results from international.  F/X did benefit the quarter by approximately $0.02; however, the focus this morning will likely be on the divergence between domestic same-store sales performance and the solid EBIT expansion. Sales came in lighter than expected at -2% in the domestic stores vs. a flattish expectation.  Management attributes the weakness to deflation in grocery and electronics as well as a slight decrease in customer traffic.  This marks a sequential deceleration in traffic from prior quarters (recall that 3Q traffic was up 1.5%).  Management expects difficult comparisons in 1Q to continue to put pressure on the topline, a trend that is expected to improve gradually as 2010 progresses.   On a 2Yr basis same store sales momentum decelerated for the third quarter in a row. 


In a slight shift in tone, management focused on the operational improvements underway at Wal-Mart aimed at driving gross margins higher through better sourcing and efficiencies as well as to leverage expenses even with a sluggish domestic topline.  It is clear that the bar has been lowered for sales expectations in the near term.  Interestingly, the often used term “price leadership” was not nearly as prevalent on the 4Q call as it was going into the holiday.  Perhaps self-driven deflation has been partially to blame for the weakness in sales.  Certainly the law of large numbers creates tough hurdles for traffic growth.  Guidance for 1Q also implies a deceleration in same store sales on a 2-yr basis, a trend which has now been building for three quarters .  The real question now is how much upside can really be generated without a sales benefit.  Clearly 1Q and full year guidance, of $0.81-$0.85 vs. Street at $0.85 and $3.90-$4.00 vs. Street at $3.97 respectively, takes into consideration a topline that will remain muted at least over the next couple of quarters.  With the Street “warming up” to the name since the new year, sentiment may be tempered as customer traffic dipped into negative territory for the first time in while…


Look at WMT’s trajectory on our SIGMA chart. The triangulation of sales, gross margins and inventory is as good as its been this cycle, and now we start to anniversary tougher numbers. Management’s tone shift towards execution could not come at a better time.


R3: WMT: Execution-Mart - 1




  • Whether the WAG/Duane Reade transaction ultimately works is still unknown, but the big win here is for the people of New York. With plans to continue remodeling stores (30 are complete and they are substantially better than the typical store) and to keep the brand name, customers should benefit from improved pricing, better systems (especially pharmacy), and hopefully improved service levels. Imagine if consumers actually didn’t dread going into a Duane Reade?
  • OfficeMax noted that for the first time in many quarters, revenue from new customers exceeded revenues lost from former customers. With that said, sales of lower margin consumables continue to adversely impact the product mix as discretionary sales are still under pressure.
  • With the wind at its back thanks to the Shape-Ups frenzy, SKX is taking several steps to offset challenging comps in the 2H including 10%+ store growth in 2010 and new licensing agreements that include a kid’s apparel line to launch this quarter.  As the company looks to sustain its growing top-line, management noted they expect to break ground for its new DC in the 1H and to become operational in 2011 – towards the back-end of prior expectations of 2H F10 to 1Q of F11. With backlogs up 40% heading into Q1 and new Shape-Up related product extensions rolling out over the next few quarters the timing of the DC transition is likely to become increasingly important as capacity tightens perhaps unsustainably towards the back half of 2010.




Simon Urges General Growth to Accept Bid - Simon Property Group Inc. shot back Wednesday at General Growth Properties Inc.’s rebuff of Simon’s $10 billion takeover bid in a strongly worded letter that urged serious talks and warned the offer “is not open-ended.” The letter from chairman and chief executive officer David Simon addressed to General Growth ceo Adam Metz called on him to accept the unsolicited bid for Simon Property’s bankrupt rival as being in the best interests of General Growth’s shareholders and creditors. For the entire text of David Simon's letter, click here. “I want to reiterate that our offer is not open-ended, and we have a number of other opportunities under consideration,” Simon wrote. “We sincerely hope you will engage seriously with us without further delay.”  Simon emphasized the advantages of doing a deal with Simon now rather than going forward with the bankruptcy process. General Growth said Tuesday that Simon’s offer wasn’t sufficient “to preempt the process we are undertaking to explore all avenues to emerge from Chapter 11 and maximize value for all the company’s shareholders.”  <wwd.com>


Whole Foods, Bed Bath & Beyond to Cut Suppliers Sourcing Fuel from Oil Sands - To cut their carbon footprints, retailers Whole Foods Market and Bed Bath & Beyond are dropping suppliers that source fuel from Canada’s oil sands (also known as the Alberta Tar Sands), reports the Financial Times. While Whole Foods Market has switched to suppliers sourcing U.S. crude oil, Bed Bath & Beyond instituted a new policy that encourages its transportation providers to avoid high impact fuels including those from refineries using Tar Sands. The decisions are not expected to impede the flow of Alberta oil to the U.S., which represents a fifth of all U.S. energy imports, but it does send a signal against synthetic crude oil from Alberta, reports the Toronto Star. Both companies are responding to ForestEthics’ campaign launched last year to urge U.S. corporate companies away from oil sands fuel, which has a higher carbon content than conventional crude oil, reports the Financial Times. ForestEthics is negotiating with more than 30 companies to adopt similar policies, according to the article. The oil sands represent the largest oil reserve outside Saudi Arabia and reduce Washington’s dependence on Middle Eastern fuel, reports the Financial Times. <environmentalleader.com>


True Religion Targets Online Counterfeit Operators - Counterfeits have been a problem for leading premium denim labels like True Religion and Seven For All Mankind. True Religion Brand Jeans is employing a new weapon in its fight against waves of counterfeiters that have taken their wares from the cold streets to the warmer environs of the Internet. The Vernon, Calif.-based premium denim label was among the first brands to enroll in tests of Site Staydown, a new service from online brand security firm MarkMonitor that promises not only to shut down Web sites hawking knockoffs, but also to keep them closed. MarkMonitor began a wider rollout of Site Staydown this week, noting the apparel and footwear brands involved in the pilot program were able to shut down more than 100 sites they identified as selling counterfeit or pirated goods. Deborah Greaves, True Religion’s general counsel, said the company noticed an increase in the number of counterfeits being sold online in the summer. While the brand had seen online counterfeiting before, Greaves said Web activity exploded in mid-2009 on sites with dubious domain names like discountbrandjeans.com and myluxuryjeans.com. Some cyber squatters had gone so far as to register domains that included the company’s name.  <wwd.com>


Bernard Chaus in Default on CIT Facility - Bernard Chaus Inc. has informed the Securities and Exchange Commission that it is in default on its credit agreement with The CIT Group, putting its ability to continue as a going concern at risk. The New York-based sportswear firm didn’t specify which of its financial covenants weren’t met and said CIT was continuing to provide it with financing following an agreement on revisions and amendments to an earlier pact reached on Sept. 10 and now set to expire on Sept. 18, 2011. Chaus is seeking further revisions but noted that its ability to go forward could be in peril should CIT opt to demand immediate payment or terminate the agreement. Obligations under the new agreement are secured by a “first priority lien on substantially all of the company’s assets, including accounts receivable, inventory, intangibles, equipment and trademarks and a pledge of the company’s interests in its subsidiaries.” The September agreement provides Chaus with a $30 million revolving line of credit, which includes a $12 million sublimit for letters of credit. Its covenants cover financial measures such as tangible net worth, minimum EBITDA and leverage ratios, according to the Form 10-Q filed with the SEC this week. <wwd.com>


Ace Hardware adds mobile site to its multichannel toolbox - Retailers going mobile have been making mobile sites, apps and texts a part of their multichannel strategies, especially in using m-commerce to help shoppers get to stores and find useful information while in stores. Ace Hardware Corp. is no exception. The merchant has launched a mobile site that does not complete purchases but instead gives shoppers a tool to use while out and about or in an Ace store. The home page makes the goal of the site clear with a bold headline: “Welcome to the Ace Hardware mobile site. Get in. Get help. Get on with your life.” The first function offered is a store locator, where shoppers can enter a Zip code and get a list of stores ordered by distance. <internetretailer.com>


Yue Yuen's Revenues Climb 14% in January - Hong Kong's Yue Yuen Industrial (Holdings) Ltd, the world's largest contract footwear manufacturer, announced that its operating revenue in January grew 14% to $502.45 million from $438.89 million in the same month of 2009. <sportsonesource.com>


McQueen Business to Continue Despite Founder’s Suicide - The Alexander McQueen business will go on despite the suicide last week of its founder and creative director, said Robert Polet, president and chief executive officer of Gucci Group. "We believe in the future of the brand," said Polet, speaking at PPR’s annual results presentation here. "Lee was very proud of the people working in his company, and so am I." He added that a McQueen collection would be presented during Paris Fashion Week. In 2000, Gucci Group, the luxury division of PPR, swept in and bought a 51 percent stake in McQueen’s company, bringing an end to the designer’s rocky stint as Givenchy’s couturier at rival luxury group LVMH Moët Hennessy Louis Vuitton. The acquisition set the stage for expansion via signature boutiques in the fashion capitals of London, New York and Milan; a secondary line called McQ licensed to Italy’s SINV; men’s wear and leather goods, and collaborations with the likes of Puma, Samsonite and the mass retailer Target.  <wwd.com>


New Credit Card Regulations Take Effect Monday -  Swiping that card at the check out counter will soon have a whole new meeting for some consumers. Beginning Monday, new credit card regulations will kick in some of which will benefit consumers. One of the biggest changes is that credit card companies must give the consumer 45 days notice before making any changes on the account; changes that include interest rate hikes. "If the consumer disagrees, they can close account and will be given 5 years to pay off the balance," Romero said. It doesn't stop there; with part of the new 'Credit Card Act' creditors won't be allowed to charge you over the limit fee instead, your card will be denied. However one regulation states that creditors will no longer allow anyone under the age of 21 to obtain a credit card without a co-signer and that got mixed reactions from consumers. <newswest9.com>


After last weeks impressive drop, claims took a step back this week, rising 31k to 473k from 442k the week prior (revised up 2k). This brings the 4-week rolling average down 1.3k to 467.5k from 468.8k last week.


The trend in claims, while still improving, is at the high end of the range depicted by our three standard deviation channel in the following chart. That is to say, the trajectory of improvement has slowed considerably over the past five weeks. We think it's still too soon to call a reversal of the trend in the recovery, but on the margin we think claims remain the best predictor of future credit trends. As such, this data represents a temporary overhang on our bull case for consumer finance companies like American Express.


Joshua Steiner, CFA



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Men With Brooms

“It's not just a rock.  It's forty-two pounds of polished granite, with a beveled underbelly and a handle a human being can hold.  Okay, so in and of itself it looks like it has no practical purpose, but it's a repository of possibility.”

-Paul Gross


Keith and I have enjoyed watching the first few days of the Winter Olympics in Vancouver.  The opening ceremonies were breathtaking despite a few minor glitches and Canada has already had a strong showing in competition.  In fact, Canada is currently sitting in fourth place in medal count and has won two gold medals.


While this is a great start to the Olympics, most Canadians are of course waiting for the medal round to begin for Canada’s most dominate sport.  That sport is, of course, curling.  While I’m sure most of you thought I was going to say hockey, and while we Canadians are pretty darn good at hockey, we dominate world competition in curling.  In fact, there have been 51 World Championships for curling and Canada has won 31 one of them and finished in the top three more than 90% of the time.  Never has a nation so dominated a major international sport!


In the short term, I am confident that Canada’s domination in curling will continue. In the longer term, for Canada to dominate, she will have to continue to do all the right things.  As we look around the global macro map this morning we see a number of countries that have dominated historically, and are now starting to lose, to use a curling term, “the hammer”.


Most notably this morning on that front is Great Britain.  For the first time since 1993, which is as long as records have been kept, Great Britain has recorded a deficit for the month of January.  Since January is typically the month of the most tax receipts, this is a concerning data point for Her Majesty’s fiscal health, as revenues should be higher than expenses in January. 


This burgeoning deficit is only one of many concerning factors in our economic model for Great Britain.  As our European Analyst Matt Hedrick wrote yesterday, Great Britain also has a growth problem (GDP up only 0.1% last quarter), an unemployment problem (7.8% unemployment which is the highest in 12-years), and looming inflationary pressures (CPI up 3.5% year-over-year in January).  Curling has a rule that allows a team to concede defeat when a win seems very unlikely.  While we are not sure Great Britain will concede defeat on her economy, we will remain short her in our virtual portfolio via the etf EWU.


As we prepare our virtual curling brooms for the market "bonspiel" to open this morning and review the global macro news from our “hack” here in New Haven, we are encountering a number of data points that are important to highlight before the “lead” throws the first few "rocks" today.


First, the dollar is up again to nearly a nine month high versus the Euro.  This is on the back of an expectation for better relative growth in the U.S.  While the U.S. probably doesn’t deserve much more than a golf clap for outgrowing the United Kingdom and the Eurozone in this year’s market bonspiel, the fact remains capital will flow to those economies that recover quicker.  The U.S. dollar price action this morning continues to support our long position in the U.S. dollar in our virtual portfolio via the etf UUP.


Second, the IMF announced its intention to sell just over $6BN in gold this morning.  This has gold selling off just over one percent this morning.  While this move has the gold bugs scrambling, it is obviously a supportive data point for our bearish case on gold based on an increase of supply into the markets.


Finally, we wanted to highlight a key point from the municipal bond world this morning.  We currently have no position in that market, but are starting to see signs that the domestic municipal bond market could be going the way of sovereign debt.  This morning the Los Angeles School district announced a $1.75BN bond offering.  While we are all for school improvements, selling massive amounts of debt when you are running a deficit (as Los Angeles is), is not the best strategy if you want to win in the last “end”.


“Hurry hard” is one of many expressions that curlers yell at their rocks as they are sliding down the ice.  While sweeping the ice in front of your curling rock will help it move faster, yelling at a rock will have a limited real impact and is really much more of a tradition.


The global macro market "bonspiel" is not dissimilar.  While we can hope that our positions go our way and we can yell at our Bloomberg screens, as “Skip” McCullough likes to say, “Hope is not an investment process.”  The best process is in fact to get your brooms on the ice early and prepare for the market "bonspiel" while your competitors are still celebrating yesterday’s successful “hit and rolls”.


Good luck at the rink today,


Daryl G. Jones

Managing Director





XLK – SPDR Technology — We bought back Tech after a healthy 2-day pullback on 1/7/10.


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).

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 mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.



EWU – iShares United KingdomThe TREND of higher y/y inflation and stagnant growth = stagflation. For a country with the UK's balance sheet and leadership problems, that’s not good.  


SPY – SPDR S&P 500We re-shorted the SP500 at an attractive re-entry point on 2/16/10. We are bearish on US Equities for the immediate term from this price. Shorting green.


XLE – SPDR EnergyWe remain bearish on Oil for the intermediate term TREND and bullish on the US Dollar on the same duration. Everything has a time and a price.  


GLD – SPDR Gold We re-shorted Gold on this dead cat bounce on 2/11/10. We remain bullish on a Buck Breakout and bearish on Gold for Q1 of 2010, as a result. 


RSX – Market Vectors RussiaWe shorted Russia on 2/9/10 and maintain our intermediate term TREND bearish view on the price of oil.


XLP – SPDR Consumer StaplesThe Consumer Staples sector finally broke both our TRADE and TREND lines on 2/8/10. Given how many investors own these stocks because it was a "way to play the weak US Dollar" last year, we have ourselves another way to profit from a Buck Breakout with this short position.


EWJ – iShares JapanWe re-shorted Japan on 2/2/10 after the Nikkei’s up move of +1.6%. Japan's sovereign debt problems make Greece's look benign.


IEF – iShares 7-10 Year TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.


The Macau Metro Monitor, February 17th, 2010



Per-capita spending of visitors increased by 1% YoY to MOP 1,807 in the fourth quarter of 2009.  Analyzed by place of residence, per-capita spending of Mainland visitors took the lead, at MOP 3,563; per-capita spending of those from Southeast Asia; Taiwan, China; and Hong Kong amounted to MOP 1,814, MOP 1,606 and MOP 1,212 respectively.The average length of stay of visitors held stable at 1.1 days, same as the fourth quarter of 2008, with Mainland visitors staying an average of 1.3 days.



Preliminary estimates showed that 230,000 passengers, slightly lower number than Tuesday's, passed through the Gongbei border. About one in four, ~90,000, were Chinese mainland visitors. From Lunar New Year Eve to yesterday, a span of five days, the total number of passengers who passed through Gongbei reached 940,000, representing a 5% growth YoY (Mainland visitors increased by ~8,950 YoY). 



Q4 was disappointing but that may be because expectations – including ours – got out of whack. The story now is Macau post Chinese New Year.



I must say that I’m shocked LVS missed Street EBITDAR projections and that’s with a higher than normal hold percentage.  We were above the Street and are usually closer to actual due to our proprietary Macau data and the fact that the Street doesn’t have Anna.  So what happened?


First, Las Vegas was a disaster.  It looks like Venetian and Palazzo tried to hold rate in a bad environment and occupancy suffered – down to 78% and 85%, respectively.  This lowest occupancy quarter in their history impacted slot volume –  down 31% and – non-gaming revenues which were down 23.7%.  Also, the gaming components are not adding up, indicating that cash back programs to high end players were aggressive as they may be accounted for directly as a contra revenue and not grouped in promotional allowances.  Finally, the YoY cost cutting impact has moderated.


In Macau, The Venetian at $175 million was in-line with our estimate.  Sands Macau, however, was a little funky.  Even excluding the $12 million bad debts hit - $5 million would’ve been normal bad debt expense – EBITDA was way off.  Net gaming revenues were $49MM higher than 3Q09, and hold was 21 bps better, yet EBITDA was $5MM worse.  Either junket commissions were a lot higher or fixed operating expenses climbed $16 million sequentially.


So those are the Q4 takeaways.  Let’s look forward.  Las Vegas looks better.  Better than bad may not be great but at least it appears to be moving in the right direction.  Whether comparisons are just getting easier or the underlying fundamentals are actually improving remains to be seen.


Management said they couldn’t give Q1 commentary on Macau but, wink, wink, “we are smiling, not frowning”.  No doubt.  We know exactly how well they did in January and the casinos are packed over the Chinese New Year celebration.  What happens after remains our concern as we pointed out in our post yesterday, “THE FUTURE BECOMING THE PRESENT IN MACAU”.

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 80.51%
  • SHORT SIGNALS 78.32%