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Bernanke Sees Inflation, Finally!

There are plenty a market pundit making noise in the marketplace today that the “core inflation” report was benign. Most of those pundits have been US Dollar bears, interest rate doves, and need a reason to support their misplaced view that the Fed wouldn’t tighten this year. So take their narrative fallacy for what it’s worth.


Having been a buy-sider for most of my career, like you, I get the joke. Sell side strategists usually take a point of view and look for data points to support that view. They do not have a platform to change their “views” dynamically. Markets obviously move dynamically. So does your P&L.


Since the US Government has changed the calculation of inflation 9 times since 1996, we do not subscribe to the groupthink associated with taking the government’s word for it. Headline inflation doesn’t have the government sponsored adjustments like “core inflation” does. So we use headline.


Headline inflation is now running up +2.6% year-over-year growth as of this January report, and I think it will remain elevated well beyond any estimate coming out of Washington until at least August (that’s when we lap the low in the chart below of -2.1%).


Bernanke is tightening because he finally sees the inflation threat implied in this chart. It’s as plainly obvious as reported deflation was when the pundits were chasing the rabbit of the next Great Depression.



Keith R. McCullough
Chief Executive Officer


Bernanke Sees Inflation, Finally! - CPII



There’s nothing wrong with cashing out while the iron is hot, but with new issues being shelved by the day and at the same time the pipeline is building for offerings by other retailers, we wonder if this is already the beginning of a more pronounced slowdown in fundamentals and share price performance for Rue 21.



There’s no question that the hottest growth story in all of specialty retailing is recently IPO’d Rue 21.  Perhaps this is because it is also one of the only true unit growth stories in all of retail. Whether the company ever fully realizes its 1,500 store stated potential remains to be seen, but with a current base of 500 there appears to be plenty of runway ahead.  Now officially public for 3 months, the value priced fashion retailer catering to 11-17 year olds is prepping for its first secondary.  Private equity sponsor, Apax Partners, is the primary seller with 5 million shares expected to hit the market.  On the plus side, a slug of stock at this magnitude will nearly double the company’s float and likely provide some liquidity for the thinly traded shares whose volume is just averaging 128,000 shares/day.  On the flip side, the speed at which Apax is looking to exit its position is certainly worth noting.  There’s nothing wrong with cashing out while the iron is hot, but with new issues being shelved by the day and  at the same time the pipeline is building for offerings by other retailers, we wonder if this is already the beginning of a more pronounced slowdown in fundamentals and share price performance for Rue 21.


According to Hedgeye’s quantitative model, the shares have already broken the TRADE line of $29.21- not a good sign for the bulls. 


 RUE TAKE TWO - RUE 21 chart


From a fundamental standpoint, the company’s results out of the box have been nothing short of stellar.  Earnings for the holiday period were pre-announced to be 50% above Street estimates ($0.30 vs. $0.20 est.)  However, same-store sales did slow to a mid-single digit rate from 13.5% in 3Q.  Management was quick to point out that compares were tougher in 4Q.  Same store sales are slowing against tough compares, square footage growth is ramping up, and earnings are coming in substantially higher than expected.  This certainly sounds like a good time for some good old-fashioned risk management on the part of Apax, a.k.a taking money of the table.  From our risk management standpoint, this is setting up to be a short.  We cannot help but recall the company’s investor presentation from the ICR conference in California just about a month ago.   We suspect this will actually be recycled for the upcoming roadshow.  A recap of the notes from the conference reads:


The first five minutes were centered on the company’s recent IPO, strong share price performance, growth track record, and plan to dominate retailing like we’ve never seen before (we may be exaggerating, but not by much).  Key points from Rue (that are not made up):


  • When asked by the company’s pre-IPO investors if they were ready to go public, the CEO responded “Why not?”.  The entire IPO process was completed in 3 months!
  • On several occasions during the presentation, the CEO mentioned that Rue is the fastest growing retailer in the U.S.  With just over 500 stores, management now believes there is an opportunity for 1,500 stores! Prior expectations were for a 1,000. 
  • It’s all about speed.  Speed to market on merchandising through exclusive use of domestic resources and US based importers.  Speed to open stores, which only takes 6 weeks from signing a lease.  Speed to double the store base which should only take another 3.5 years. 
  • Finally, the CEO ended with “I’m proud to say our stock price is up 60% since the IPO and we’ve added $300 million to our market cap”.  Hmm…it seems clear what motivates these guys.


The timing here is key.  It’s probably best to let the dust settle on the secondary process and keep an eye out for the road show.  Management’s short history in the public eye suggests they’ll follow the deal with additional upside.  Both quarters out of the box have been blowouts to the upside.  However, nothing last forever, let alone industry leading growth driven by a value-priced, fashion merchandising strategy.  Ironically, RUE went public on the same day as Dollar General- two companies with value propositions and growth prospects bolstered by a weak economy, not an improving one.


Eric Levine


R3: NKE: The Catalyst Calendar is Building


February 19, 2010


Last night Nike sent out a ‘save the date’ notice for an analyst meeting in May for shareholders and analysts.  But of course word gets out at lightning speed to just about everybody (to far more people than can be accommodated). It’s gonna prove to be one of the more critical – and positive – events for Nike in a while.





As we’ve been saying for the better part of two months, Nike should emerge as a standout name in the Consumer space in 2010. Yes, some are bullish on the name. But I think it is still underloved and underappreciated by the Buy Side, and those that are on board on the Sell Side like it for the wrong reasons. Ultimately, both the magnitude and duration of an earnings recovery here – after 2 years of flattish earnings – will be far greater than the consensus thinks.


The calendar is shaping up nicely here. Olympic press is nice (though only a slight positive as most people don’t walk around the Street wearing Luge Unitards). Then we should see better order flow globally in advance of the 1) World Cup, and 2) more importantly – the benefits of Nike’s reorg last year, which went on offense in May. Count the 9-month product development/sales cycle forward from that point. Yes, we’ll see increased flow starting in Spring. We’re going to go through why – in detail – upon release of our next Black Book on Friday the 26th. Details including the dial-in and presentation will be sent to subscribers next week.


In the meantime, here’s a noteworthy chart to chew on. It shows the timing of Nike past analyst meetings vs. the stock. How can we forget that fateful meeting a decade ago when Nike dropped a bomb intra-meeting and the stock cratered. This was a different era for a different management team with financial reporting processes that were primitive relative to what it has since built. And in fact, check out how the stock performed subsequent to every other major analyst event.


Look out for our Black Book next week.


R3: NKE: The Catalyst Calendar is Building - NKE AnalystDays 2 10




  • Wal-Mart noted that its fourth quarter sales for the company’s ecommerce site increased by 30%. The growth rate is among the highest in all of retail for an established brand, including those that operate with an internet-only strategy. For the full year, walmart.com recorded 1 billion visits to its site. As a result, it’s no surprise that Wal-Mart is looking to accelerate the growth of its multi-channel capabilities around the world. 
  • Despite a still-weak topline, KSwiss is ramping up their marketing spend as the company looks to position itself as “The” California Sports Company. In 2010, marketing spend as a percentage of sales is now expected to reach all time high levels as the company launches and develops new products as well as looks to engage additional sponsorship and endorsement opportunities. This approach to a spending induced sales recovery effort puts the company in a very small group of companies that have gone on offense at a time where visibility on sales still remains very cloudy. 
  • Keep an eye out for the latest technology aimed at bridging the gap between online or virtual shopping and physical retailing. Watch company, Nooka, just released a video depicting augmented reality technology which “virtually” allows a consumer to try on a watch and see how it would look on his/her wrist. By placing a paper template, which looks like a watch, on your wrist and then using a webcam in conjunction with the company’s website, you are then able to “try on” any watch you’d like. The screen then displays, in real-time, your live image with a superimposed virtual watch on it. Trust us, it’s really cool. http://tinyurl.com/yzn5tur




GGP Declines Simon Offer - Bankrupt mall operator General Growth Properties Inc. said Thursday that it declined Simon Property Group Inc.’s $10 billion offer to purchase the firm. GGP chief executive officer Adam Metz said in a letter to David Simon, his counterpart at Simon, that “your objectives are not aligned with ours,” but added he hoped Simon would participate in the restructuring process getting under way. “As we have previously stated, our objective is to maximize value for the company and its stakeholders, and we are engaging in a process that is intended to accomplish that result in an expeditious manner,” Metz wrote. The move came a day after Simon urged serious talks between his firm, the nation’s largest mall operator, and its next biggest competitor. Simon declined to comment on GGP’s response.  <wwd.com>


Blackstone Said to Consider Joining Simon in General Growth Bid - Blackstone Group LP, the world’s largest private-equity firm, may join Simon Property Group Inc.’s bid to buy bankrupt General Growth Properties Inc., two people with knowledge of the discussions said yesterday. Blackstone is in preliminary talks with Simon, the biggest U.S. mall owner, said the people, who declined to be identified because the negotiations are private. Simon, which made a $10 billion takeover offer for General Growth public Feb. 16, would lead any resulting partnership, one of the people said. A collaboration with Blackstone would give Simon more “firepower” and may allow it to raise its offer after General Growth rebuffed it as too low, said Ben Yang, an analyst with Keefe, Bruyette & Woods in San Francisco. General Growth would consider a new bid if it was high enough, rather than moving forward with a plan to solicit more proposals, according to a person with knowledge of the Chicago-based company’s position. <bloomberg.com>


Adidas for Rent in Tokyo - Adidas is taking advantage of the increasing popularity of running among the Japanese and will open a new concept store, Adidas Runbase, here today. In addition to stocking Adidas clothing and shoes geared toward running, the shop will act as a base for runners in the city. Men and women will be able to rent shower and locker rooms for a fee of between 500 and 700 yen (about $5.50 to $7.70) a visit. The store also lends running shoes for 200 to 300 yen ($2.20 to $3.30) and clothing sets for 500 yen ($5.50). The store’s location is also unique, as it is not near any of Tokyo’s major shopping and retail areas. It is, however, just 1,000 yards from the grounds of the Imperial Palace, a popular running area in Tokyo. Runbase will be open from 7 a.m. to 10 p.m., making it ideal for government and office workers in the city who want to get in a run before or after work. Staff at the store will be able to help customers design their own pair of customized performance running shoes, which are tailored to the exact size and shape of each individual foot. Specialists also will hold running-themed workshops, clinics and events at least once a week.  <wwd.com>


Sears Begins Franchising Of Its Auto Centers - For the second time in a week, Sears Holdings Corp. (SHLD) said it is turning to outsiders to help expand its business as the company said Thursday that it is allowing franchisees to open Sears Auto Centers. Sears said it is offering auto dealers that recently lost their new-car franchises a new use for their space: Sears Auto Centers offering parts and services; over-the-counter merchandise; and previously owned vehicle sales. The franchises will have the same products and services available at about 850 locations. <wsj.com>


ASDA to Open Smaller Scale Stores - JPMorgan analysts say that ASDA, the U.K. arm of Walmart, intends to open 100 smaller format stores in the next three to five years, as well as 150 non-food stores, an acceleration of the roll out of its ASDA Living format. More plans are expected to be outlined soon, but it's believed that 75 percent of ASDA's growth will come from smaller stores, online and non-food.

The announcement is significant in the context of ASDA's previous experiments with smaller stores, which ended in it closing its George clothing stores and ASDA Essentials, which sold mostly own-brand goods. <licensemag.com>


Filene's Pays Creditors $41M - Filene’s Basement Inc., now known as FB Liquidating Estate, has paid out more than $41 million to its creditors, according to restructuring firm Abacus Advisors. Secured creditors have been paid in full, as holders of priority claims and convenience class claims have received their allowed payments and unsecured creditors have had 50 percent of their allowed claims paid. An initial distribution of dividend checks was completed Friday. Filene’s Basement filed for Chapter 11 protection on May 4 and was acquired by Syms Corp. June 18. <wwd.com>


U.S.-Made Apparel Prices Down Slightly in Jan. - Wholesale prices for U.S.-made apparel declined 0.1 percent in January compared with December and were flat in yearly comparisons, the Labor Department said Thursday in its Producer Price Index. Women’s domestic apparel prices declined 0.4 percent month-to-month and dropped 0.2 percent compared with a year earlier. Men’s apparel prices rose 0.5 percent in January and advanced 0.6 percent in 12-month comparisons. Prices for all goods and services increased a seasonally adjusted 1.4 percent in January, driven primarily by rising gas prices. In December, prices rose 0.4 percent and in November prices were up 1.5 percent. Brian Bethune, chief U.S. financial economist with IHS Global Insight, said price increases last month were “actually pretty tame given that January is a typical month to raise prices.” The PPI for apparel is not a true indicator of industry price fluctuations because of the relatively small number of manufacturers operating in the U.S. The Consumer Price Index, due out today, includes imports and is considered a more accurate barometer of pricing trends.  <wwd.com>


Weak U.K. retail data raise fears of double-dip recession - The heaviest snowfalls in decades and the rise in VAT caused havoc on the high street in January, forcing retail sales down sharply and raising the threat that the economy could slip back into recession in the first quarter. Sales volumes fell 1.2 per cent excluding petrol and diesel as parts of the country were brought to a standstill by snow early in the month. The rise in VAT back to 17.5 per cent after 13 months at a lower rate probably also contributed to reluctance to spend. The data, from the Office of National Statistics, echo private sector surveys from the British Retail Consortium and CBI reporting very weak sales in January. The BRC said it had been the worst January for retailers in 15 years. Including fuel, sales fell 1.8 per cent, the biggest drop in business on the high street since 1995, apart from an unusually volatile period in spring of 2008. “High street spending grew at relatively solid rates in the second half of last year and it would be no surprise if sales bounced back in the next month or two,” said Jonathan Loynes of Capital Economics. “At the very least, these numbers provide a very weak platform for sales in the first quarter of this year and therefore raise the chances that the economy may succumb to a double-dip.” <ft.com

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The Macau Metro Monitor, February 19th, 2010


TIGER ROARS IN MACAU Destination Macau 

 According to a report in today's Macao Daily News, gaming revenues for the first three days of Chinese New Year were disappointing – day one only rang in MOP 90 million, day two wasn't much better with gaming revenue of only MOP 100 million, and day 3 was just more normal at MOP 300 million – i.e. back to the daily average for the first week running up to Chinese New Year. However, days four through six where bustling with packed ferries and swarming crowds. DM reporters commented on the record turnout at the Venetian where the gaming floor was heaving and the malls were seeking brisk business. Neighboring City of Dreams should have racked up its best daily numbers since opening, too, judging by the foot traffic they saw. The peninsula, meanwhile, was buzzing. Sources at Grand Lisboa say they have not seen the place so full since it opened in 2007. Wynn, MGM and StarWorld all looked packed, too.

GAMING DOWN IN FEBRUARY macaubusiness.com

According to statistics from Rádio Macau, February gross gaming revenues in Macau should be lower than the previous month. Until February 17, the gross gaming revenues surpassed a total of MOP5.3 billion. For the whole month, predictions are that the gross gaming revenues will stay below MOP9 billion, still better than the MOP7.9 billion recorded a year ago. Gross revenues at Macau casinos hit a record MOP14 billion in January 2010, the highest monthly revenue ever recorded, according to Portuguese news agency, Lusa. 


The DM believes there is a delay on resumption of sales of the "co-op" units, which may or may not be tied to a delay in the government issuing the necessary work permits to get construction restarted on Lot 5&6. But a delay does not mean an impossibility. When those sales do resume, the DM believes they will be able to fetch as high as 30-40% above the current top of the market rates in Macau.



The first casino in Singapore made S$40MM in the first two days of its opening and Malaysians contributed one-third of the revenue. Within hours of Genting Group chairman Lim Kok Thay opening Singapore's first casino on Feb 14, it had to shut its doors due to overcrowding. More than 35,000 punters showed up to try their luck at the casino on Feb 14 and 15.


RECORD REVENUE Macaubusiness

Macau’s public finances suffered no recession in 2009, as revenues collected marked a new annual record at MOP57.64BN, an increase of 0.014% or MOP8.1MM over the previous year.  Direct taxes from gaming revenue in 2009 grew 5.8%  to MOP41.87BN. Public expenditure rose 18.5% to MOP33.82BN. A surplus of MOP23.82BN was recorded in 2009, down from the MOP29.09BN recorded in 2008.

Discounting The Obvious

“Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected.”

-George Soros


Soros’ track record calling macro market moves speaks for itself. He was born in Budapest, Hungary. He went to school in London. He has worked against New York City’s traffic jams of consensus for most of his career. When it comes to betting on the unexpected, he’s no stranger to Discounting The Obvious.


For real-time risk managers, our daily task is to reveal consensus for what it is, then to capitalize on it when the timing is right. Sometimes consensus is right. Sometimes it isn’t. For the last 3 months, consensus has had the pace of global monetary tightening dead wrong.


Rather than get into an academic debate about whether the Fed’s move to raise the Discount Rate last night is an explicit tightening signal or not, we market practitioners will simply refer investors who are marked-to-market to the charts of the US Dollar and US Treasury Bond Yields. Markets don’t lie; people do.


You can pull up a 3-day or 3-month chart of either and the take-away is the same. Both the US Currency and Bond markets have been Discounting The Obvious now for 3-months.


The last holdout in the US Bond market has been the short end of the yield curve. That’s because it was being politicized and held artificially low. This morning, that’s changed. Short term yields (2-month US Treasuries) are shooting straight up, breaking-out above my intermediate term TREND line of 0.88% to 0.94%.


Taking a step back to consider where global market moves are versus our out-of-consensus expectations, we kicked off 2010 with 3 Macro Investment Themes:

  1. Buck Breakout (bullish on the USD, bearish on gold)
  2. Chinese Ox In a Box (bearish on Chinese equities, bullish on Chinese currency)
  3. Rate Run-up (bearish on Treasuries, bullish on Global Bond Yields)

Altogether, given the economic data coming out of both the US and China, these calls weren’t that difficult to make. Both countries continue to reveal higher than expected growth and inflation data. In the face of these facts, an assumption of an “extended and exceptional” US monetary policy of ZERO percent interest rates is both unsustainable and unreasonable.


In terms of the Buck Breakout call, a lot of consensus strategists in America started to justify US Dollar strength by virtue of Europe’s sovereign debt problems. While that may be a convenient explanation, it’s not the entire explanation. Since we called it the “Bombed Out Buck” in Q4, the US Dollar Index has had a +9.3% melt-up from its Burning Buck lows. There is a lot more to a monster currency move like that than just Greek and Spanish CDS.


I don’t think I have been too critical of Ben Bernanke. I simply had an inflation forecast that didn’t line up with his. This morning I am going to pat the man on the back for seeing the inflation data for what it is – inflationary. He Who Sees No Inflation is seeing the light. This is progress.


Inflation? Yes, it’s out there. The US Producer Price report (PPI) for January was reported well ahead of consensus expectations yesterday at +4.6% year-over-year growth. Now a man making CDO’s on Park Avenue in New York might not feel that in his cost of goods sold, but I can assure you that a Hungarian carpenter who uses anything with metal does, particularly versus this time last year.


In terms of consumer prices (CPI), it’s both hypocritical and political to call last year’s deflationary low of -2.1% CPI (July 2009) the Great Depression Part Deux, and at the same time not recognize that the year-over-year inflation report you are going to see at 830AM this morning as inflationary. Fortuitously, we had this reported inflation catalyst in our assumptions when we made both our Buck Breakout and Rate Run-up calls.


So what do this morning? Well, I’d actually sell some of your hard earned US Dollars to the consensus beaters as they clamor for them. The US Dollar Index is trading up almost a full percent. That’s a lot in a day, and as they say on a cold winter day on Simpson Street in Thunder Bay, ‘if you gottem', sellem’!


At $81.19 this morning and $1.34, respectively, the US Dollar Index is finally going to be immediate term overbought and the Euro oversold. I am not making a call that we are no long bullish on a Buck Breakout. I am simply telling you to ring the register as consensus is finally starting to Discount The Obvious.


My immediate term support and resistance lines for the SP500 are now 1079 and 1111, respectively.


Best of luck out there today and have a solid weekend,





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.












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