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Mr. Bernanke: What Does "Macro-Prudential" Mean?

Recently, we have stopped being as critical of Ben Bernanke. This is primarily because he had the political spine to raise the Discount Rate. This is progress, however, this doesn’t mean that we underwrite (or understand) what he talks about real-time. He’s testifying in front of Congress right now – here are my thoughts:


After being chastised by Ron Paul, then supported by Barney “The Republicans Did It” Frank, Ben Bernanke has started to do what the politicians who were paid off to keep him in his seat expect him to do – pander to the political wind of keeping the Fed Funds rate at zero for an “exceptional and extended” period of time.


That, of course, is either a Japanese or unreasonable monetary policy to uphold in perpetuity. I am ok with neither. Nor should you be. The outcome of zero percent returns on your nest egg of savings is implied – its zero – and the output of carry trading on asset prices with easy money is also implied – its inflationary.


Fortunately, Bernanke pandering like this was proactively predictable. This is why we took our allocation to US Equities from 3% to 9% in the last two days of US stock market weakness.


To be clear however, sad is as sad does. I will be the first to admit it, even though we are getting paid by it today. Bernanke is completely politicized and will continue to sponsor a stock market that can rally to lower-highs on easy money speculation.


I suppose that a short term risk management model for America’s manic stock market is what he means by “Macro-Prudential.” He can’t be serious in telling us that this is a long term macro risk management plan.


My immediate term resistance line for the SP500 is now 1120. Ride the Bubble in US Politics while you can. This is like riding a bull - 8 second rallies can be fun in the short term – then one day, the bull runs you right over.



Keith R. McCullough
Chief Executive Officer


Mr. Bernanke: What Does "Macro-Prudential" Mean? - berny






“The early signs of stability seen at the end of the third quarter continued through quarter four, with growth in hotel revenues in all regions and overall revenues (pre Real Estate) up 17%. EBITDA margin was ahead of 2008, with the result that adjusted EBITDA (pre Real Estate) grew by $3.3 million to $13.5 million. Whilst we cannot yet celebrate the end of these challenging times, these results, coupled with improved bookings pace, are strong indicators that the revenue and RevPAR declines of 2009 will not be repeated in 2010."

- Paul White, President and Chief Executive Officer



  • "Owned Hotels same store RevPAR was down 7% in local currency. However, because of a weakening of the US dollar in the last quarter, RevPAR in US dollars was up 11% compared to the fourth quarter of last year."
  • "The principal variances from the fourth quarter of 2008 included results from owned hotels in Italy (up $3.8 million), Grand Hotel Europe, St Petersburg (up $1.8 million), La Samanna, St. Martin (down $1.5 million), Mount Nelson Hotel, Cape Town (down $1.6 million), and Venice Simplon-Orient-Express (up $1.1 million)."
  • "Porto Cupecoy enjoyed strong sales in the run-up to completion of the construction, with ten apartment contracts signed during the quarter, and a further five units sold since the end of the year. This means that 99 units or 54% of the total are now sold. The grand opening of the development took place in January 2010."
  • Europe: "For the region, the effect of the weakening US dollar in the fourth quarter of 2009 compared to a strengthening US dollar in the fourth quarter of 2008 had a $3.2 million positive impact on EBITDA versus the prior year."
  • North America "Excluding EBITDA of $3.2 million from Charleston Place, there was an EBITDA decrease of $1.1 million. Same store RevPAR for the region fell by 18%."


  • Weather impacted them in Peru
  • Non rooms revenues and trains & cruises had good growth in the quarter
  • Increase in Europe was all FX
  • Cost reductions implemented in the 1H09 started to flatten out
  • Key focus in 2010 will be on the sale of the residential real estate.  $68MM of sales to date and $34MM has already been received. The remaining 85 units will be sold free of debt, since the proceeds from the originally sold units will pay down the construction loans
  • Last week Madeira was hit with flash flooding, so that may impact their results
  • Quarter one bookings are tracking 6% ahead, but pricing is lower given the promotions and discounting
  • 2Q2010 is tracking behind, but they expect it to catch up given the recent pick up in volumes
  • Trains business is up 23% for 1Q2010
  • Charleston is seeing some recovery in group bookings
  • Minimal opportunities to cut costs further, now it's all about growing revenues
  • Leverage Covenant was 8x
  • Term debt maturity : 548MM in 2011, 176MM in 2012, thereafter 1445MM. $60MM due in 2010, but $34MM is related to the construction loans which will be repaid when the units close
  • $5MM of Capex in the Q + 11MM in Porto Cupecoy 
  • Cash tax was $14MM in 2009, $12-14MM expected in 2010
  • Plan to refinance maturing 2011 debt by 4Q2010


  • Europe will show better RevPAR growth since they all saw huge occupancy drops but only small drop in rate.  This is still going to be another tough year
  • Booking window in Brazil has always been short. They are 16% up on rooms booked y-o-y or 2010, but that's a small % of the total
  • Peru though tends to get booked 8-9 months in advance and because of the train closure they are down 10-15% for on the books business for 2010
  • No NY development update
  • Tone of refinancing on R/C is good, but the pricing is clearly going to be higher.  Think they can get 200ish spread. Think they can roll 75-85% of the commitment with a 3-5 year term
  • Why is Copacabana doing so well?
    • Domestic demand is very strong - over 1/3 of the travelers are domestic
  • Even in Italy the domestic demand has increased dramatically to double digits from 1-2% just a few years ago
  • 40% of their customers are from NA, 40% European
  • What are the plans with Keswick?
    • Have 40 plots left to sell, have been working with Robert Stern on designs. Hope that they will sell the plots over the next 12-24 months
  • Outlook for Grand Hotel Europe & Italian portfolio and their pricing strategy
    • In the shoulder season months they are much more focused on occupancy
    • In the peak season, they are feeling more confident that they don't need to discount as much to get occupancy
    • Grand Hotel: pickup is very strong on the room side, but are concerned on the F&B side. Don't think that he 6-7% growth they saw in Jan will continue throughout the year but still expect good results
    • Italy: too early to tell.  Bookings really just starting coming in at the end of Feb through East period.
  • TTM EBITDA at the Copa around $13MM for 2009 and peak was $14.5MM
  • Real Estate strategy
    • Cupecoy - customers have already paid about 75% of the purchase price, so they are very confident they will close on all the sold units. Just need face to face time with the client to hand the keys over which will take 3-4 months
    • Expect to sell the remaining 84 units over the next two years.  Demand has been very strong
    • If the economy recovers, will they consider starting new projects? Unclear - still far away, question of when and how

Domestic Pigs

A lot of the news flow in recent weeks has focused on the P.I.I.G.S. (Portugal, Iceland, Ireland, Greece, and Spain) and their balance sheet woes - and rightfully so. As usual, we like to focus our Hedgeyes on other issues once our calls become consensus and have been spending time state pension liabilities.


A recent release by the PEW Center on the States shows a $1 trillion gap between the $3.35 trillion in pension, health care, and other retirement benefit-related liabilities currently on States balance sheets and the $2.35 trillion in assets they have to cover them.  Moreover, that funding gap is likely to increase when 2008's losses are factored in, as many states smooth gains/losses over a average of five years.


Currently, 41 States' pension programs are less than 10% funded.  In addition, only 5% of the $587 billion liability for current and future retiree health care and other non-pension benefits is currently funded. Interestingly enough, Illinois - where current president Barack Obama was a Senator prior to taking the Oval Office - was in the worst shape of any state, with a funding level of 54 percent and an unfunded liability of more than $54 billion.


Below are some of the State level exposures that the PEW Center coagulated:


 Domestic Pigs - State Pension Funding Levels


To deal with massive deficits  - totaling approximately $290 billion - many States have tapped into their rainy day funds in fiscal 2009 and 2010 at levels not seen since the 2001 recession. 


Several States have dried up their funds to balance their current budgets, including Alabama, Arizona, California, Connecticut, Maine, New Jersey, Ohio, Oklahoma and Pennsylvania. Sixteen other states relied on their reserves to help eliminate 2010 budget deficits according to a recent NASBO survey.


Factoring in last year, a total of 41 states have accessed reserves to cover their deficits. An interesting takeaway here is that many politicians and state legislators are reluctant to draw upon their rainy day funds out of fear that it would hurt their State's bond ratings, which would ultimately drive up their cost of capital at the worst possible time.


 Domestic Pigs - Two Decades of Saving and Spending


So what's left for poor states to do? They have essentially the same three options they always have:


  1. Raise taxes
  2. Cut programs and reign in spending
  3. Issue debt to fund their deficits


Fiscal 2009 estimated tax collections of sales, personal income, and corporate taxes were 7.4% lower than actual fiscal 2008 collections. Furthermore, States are projecting a further decline of 1.4% in tax collections relative to fiscal 2009 current year estimates. Despite the low projection, raising taxes seems unlikely, considering the current state of unemployment. Although jobless claims have been, for the most part, improving steadily since last March, a 9.7% unemployment level is hardly an environment to raise taxes in. But never say never. If some of these States were named Greece, they’d be told to raise taxes.


Some States have been cutting and plan to continue cutting funding, which has been hanging many municipalities, school districts, and health programs out to dry. For example, in fiscal 2009, 29 States cut K-12 resources (21.1% of State spending) and 30 are planning to do so in fiscal 2010. Likewise, 27 States cut Medicaid funding (21% of State spending)  in fiscal 2009 and 28 are planning to do so in fiscal 2010. In New York, Governor David Paterson temporarily held back $750 million in local aid last December. In Arizona, Governor Brewer wants to defer about $350 million that is owed to school districts this fiscal year until next fiscal year.


Unfortunately for State governments, purging the balance sheet is only a temporary fix. Across the country, State governments are facing lawsuits from municipalities school districts outraged by budget cuts. Expect these lawsuits to continue until States can find a sustainable way to fund their budgets.


So with their backs against the funding wall, States must find a cumulative $18.8 billion to balance their budgets in remaining months of the current fiscal year and an additional $53.6 in fiscal 2011. Moreover, expectations for state pension fund returns on the heels of a 65% rally in the S&P seem aggressive at best.


Lucky for them, they can join Portugal, Iceland, Ireland, Greece, Spain, and our very own United States government in kicking the can down the road by issuing more debt. Piling debt, upon debt, upon debt - now that's a novel concept! Furthermore,  an interest rate hike would effectively raise the cost of capital for each of the 50 states, which would leave states like Kansas that have no access to rainy day funds feeling the pressure to issue as much paper as they can before the cost of doing so increases.


 Domestic Pigs - State Govt Debt Issuance


With funding levels at only 50-60% of liabilities, States like Illinois and Oklahoma will start to see their CDS levels rise meaningfully if fiscal 2011 budget shortcomings are not addressed. A wise man told me that governments  make bad companies, as far as balance sheet analysis is concerned. U.S. Federal and State governments are no different. While the Fed balance sheet has been getting better on the margin in recent weeks, a +$364 billion y/y number is hardly something to ignore. Furthermore, unfunded liabilities have been on the rise and will continue to be an issue.


 Domestic Pigs - US Unfunded Liabilities


By now, it's hardly news that the U.S. has found itself in a serious fiscal hole. It is important to note, however, that the $1 trillion hole left by the developing State pension funding crisis adds one more straw to the camel's back. As we say here at Hedgeye, everything that matters in global macro happens on the margin. With that in mind, the PEW Center's findings are incrementally more negative, and, on the margin, this report should make the U.S. government debt situation appear a little worse. While were not calling for the United States of America to default on its sovereign debt for the first time in history, we are raising concerns that its expanding balance sheet and accelerating sovereign debt issuance could potentially lead a downgrade in its credit rating.


While the decisions of Moody's sovereign debt rating team hardly move us at face value here at Hedgeye, we do recognize their decisions have great influence over debt markets. And we're all familiar with the inverse correlation between credit ratings and cost of capital.


Expect this to get priced into the market over the coming months, as the biggest long term TAIL risks that the global economy faces when it comes to government debt isn’t that of Greece, but of that of both Japan and our very own.



Darius Dale


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According to a franchise consultant, one of McDonald’s largest Co-Ops in the country showed a $0.39 decline in breakfast average check for the first week of February with a 3.1% increase in breakfast sales and a 10.9% increase in TCs. 


The February data points are significant as they reflect the beginning of the national launch of the $1 menu at breakfast.  In the same Co-Op for the same period, “regular menu” sales were down 1.6%.  The regular menu accounts for 70%+ of total sales for McDonald’s US Business.  Considering this, and taking the Co-Op example cited above as representative of the wider system, a 3% increase at breakfast would not be enough to move the US business back into positive territory. 

McDonald’s has a big voice when it comes to marketing so with transactions up more than 10% at breakfast there will be other companies within the breakfast day part that will begin to suffer.  For starters, it will make it nearly impossible for WEN and BKC to take any significant market share at breakfast.  Neither company has the marketing muscle or the margins to afford to be competitive. 


Given the lessons learned from 2009, I do not think that a typical SBUX customer is going to make the switch to MCD; although Dunkin has responded to the new McDonald’s dollar menu.

R3: FL: Bringing the Hardwood to Champs


February 24, 2010


FL is synching with the NBA and Adidas in a strategic partnership, in yet another example of the kind of exclusivity and differentiation that we believe will be key to the turnaround at Foot Locker.





We continue to believe in the opportunities for Foot Locker and the major effort underway to revamp the company’s merchandising and product offering. As retail earnings have dominated the headlines over the past couple of days, an announcement with little fanfare was made that brings the NBA, Foot Locker, and Adidas together in a strategic partnership. Through its Champs Sports division, the three entities are teaming up to create an official NBA shop within its stores. The offering will include official NBA/Adidas on-court licensed apparel and NBA themed fashion apparel. The merchandise is expected to range from official jerseys and uniforms to hats and accessories. Importantly, the collaboration also includes an exclusive fashion line created by Adi for Champs. Exclusivity remains one the biggest opportunities for Foot Locker and its 5 major sub-brands, and this is a step in the right direction. Not only will all of the product be provided by Adidas with some of it only available at Champs, but the entire concept of the NBA shop will be unique to the chain. Currently, the NBA has only one branded store on 5th Avenue in New York.


While Champs has always sold a limited offering of NBA gear, this represents a cohesive and coordinated effort highlighted by an 80-100 square foot area delineated by a replica hardwood floor and NBA Shop fixtures. We suspect the NBA and Adidas picked up the tab on these efforts, which is clearly a win-win from a capital allocation perspective as it relates to Foot Lockers cash flow and balance sheet. With all due respect to Nike, it’s also positive to see some efforts aimed at better balancing the brand presence within the store.


R3: FL: Bringing the Hardwood to Champs - 1


As one might expect, the merchandise will be predominately geared towards local team preferences, with additional product tied to the teams and players that resonate on a national level. Rollout is anticipated this month with 69 stores primarily in the Miami market, with expansion into other major markets shortly after. By the ’10-’11 season all 500+ stores are expected to have the 8-10 foot shops. While it is still too early to tell exactly what impact these shops will have on productivity, we believe this is yet another step in the right direction. After years of status-quo merchandising efforts, this partnership on a very basic level indicates that vendors and even leagues are excited about the prospects of working closely with Foot Locker to reinvigorate growth. If proven successful, would it be unreasonable to see a MLB or NFL shop at some point? We still believe this is just the beginning of many more merchandising changes on the way…


As a reminder we will be hosting a conference call this Friday (2/26) at 11am highlighting two of our Top Ideas for 2010 – Nike & Foot Locker. Contact to request access.


Eric Levine





  • An email in my inbox yielded an interesting take on the “limited-time” sale from Banana Republic. The After 5 Style Event advertised 25% off orders of $100 or more. However, the discount is only valid online between 5PM and 11:59PM EST time and in-store from 5PM-9PM. Given that the coupon arrived at 1:15PM the same day, it will be interesting to learn if higher value discounts offered over a short period of time can actually drive demand enough to move the needle. 
  • Macy’s CFO indicated that recent snowstorms in February have had a negative impact on sales, but that the month is still “doing well”. 
  • Target management noted that they are now beginning to see a positive turn in the performance of their home categories. While basics categories are performing well, pockets of strength in the better and best categories are also popping up. 
  • Iconix noted on its quarterly call that Wal-Mart’s Latin American sub-brand, Suburbia, will be selling Mossimo in a direct-to-retail partnership. While this is perfectly allowable under the terms of the license, it is still interesting to note that Target in the U.S has been the brand’s main growth driver over the past 10 years. We don’t often see an exclusive brand in one region, also being distributed by a competitor in another. 
  • While other areas of retailing are beginning to talk about inflation, Home Depot is not seeing any signs that product costs are on the rise. Inflation remains very low, according to management and should remain so over the course of 2010. Management also pointed out that lumber is currently only 7% of the sales mix, down from a mid-teens percentage when the housing market was much more robust. As such, lumber price increases are not having a material impact to sales at this time. 
  • When asked about e-books and e-readers, Barnes and Noble management indicated that they believe in a platform of content distribution that is open and compatible with numerous devices. This commentary is interesting, especially in light of the company’s efforts to develop and sell its own device (the Nook). As of now, it looks like BKS is taking a slightly different approach to Amazon, which is building its business almost exclusively around the Kindle. 
  • LIZ management noted that restructuring efforts have resulted in a dramatic reduction in the company’s distribution infrastructure. With a peak of 10 DC’s in 2006, the company is now operating one central facility in the US. 




Finish Line Secures Credit Facility - The Finish Line, Inc. entered into an unsecured $50 million revolving credit facility credit agreement. The facility, which expires on March 1, 2013, provides that, under certain circumstances, the company may increase the aggregate maximum amount of the credit facility by up to an additional $50 million. According to a filing with the Securities & Exchange Commission, the new credit agreement will be used by the company, among other things, to issue letters of credit, support working capital needs, fund capital expenditures and for other general corporate purposes. The new credit agreement and related loan documents replace the company's prior credit facility dated as of Feb. 25, 2005 and related loan documents, in each case as amended from time to time. All commitments under the prior credit agreement were terminated effective Feb. 18, 2010. Existing letters of credit of $3,950,350 under the prior credit agreement were deemed issued under the New credit agreement. No advances were outstanding under the Prior credit agreement as of February 18, 2010, and no advances were borrowed under the New credit agreement on February 18, 2010. Accordingly, the total revolving credit availability under the New credit agreement immediately after the consummation of the New credit agreement was $46,049,650. The company's ability to borrow monies in the future under the New credit agreement is subject to certain conditions, including compliance with certain covenants and making certain representations and warranties.  <sportsonesource.com>


Wal-Mart Plans Latin American Acquisitions, Acquires Streaming Movie Company -  Wal-Mart Stores Inc., the world’s largest retailer, plans to make acquisitions and open new outlets in Latin America, said Eduardo Solorzano, president and chief executive officer of the region. Wal-Mart is seeking growth in fast-growing markets such as Brazil, China and India as its U.S. sales have stalled. The retailer said last week that domestic sales would be “more challenging” in the first quarter after reporting fourth- quarter revenue that trailed its projections. International sales account for a quarter of the company’s revenue. In other news, Wal-Mart Stores Inc. says it will buy Vudu Inc., which sells technology and services that enable consumers to stream high-definition movies into homes. The deal, which Wal-Mart says will close within the next few weeks, puts the retailer in closer competition with such companies as Netflix Inc. and Apple Inc., both of which sell digital entertainment. Terms were not disclosed. Founded in 2004, Vudu will become a wholly owned subsidiary of Wal-Mart. Wal-Mart says Vudu’s licensing agreements with studios and distributors enable access to 16,000 movies. Consumers need broadband Internet connections and high-definition TVs or Blu-ray players to rent or buy the movies. Vudu sells boxes that attach to or are built into TVs, enabling access to movies.  <bloomberg.com>   <internetretailer.com>


Charming Shoppes launches a universal shopping cart - Plus-size apparel retailer Charming Shoppes Inc. introduced today a universal shopping cart that follows shoppers across its four e-commerce web sites: lanebryant.com, cacique.com, fashionbug.com and catherines.com. The change will allow shoppers to pay one flat shipping rate for purchases made at more than one site, as well as to have purchases shipped to its stores for free. "We're thrilled to offer our customers the ease and convenience of shopping our entire family of brands online with one universal check-out," says Jim Fogarty, president and CEO of Charming Shoppes. "This new functionality allows us to leverage the strength of our great brands while maintaining what is unique and compelling about each brand's identity." <internetretailer.com>


Calvin Klein Supplier Top Form to Boost Bra Capacity - Top Form International Ltd., a Hong Kong bra maker that supplies brands including Calvin Klein and Maidenform, plans to increase manufacturing capacity as retailers in the U.S. and Europe restock and demand rebounds. Top Form, which has almost tripled in market value over the past year, may build a fourth factory in China, ChairmanWillie Fung Wai Yiu said. The company may boost capacity by 20 percent within the next two years.  The underwear and nightwear market in the U.S., Top Form’s biggest market, may grow 2.4 percent to $12.9 billion this year after declining 8.6 percent in 2009, according to data from Euromonitor International. Top Form, which is 23 percent-owned by Belgian luxury lingerie maker Van de Velde NV, also supplies other brands sold by retailers including Victoria’s Secret and Wal-Mart Stores Inc., Fung said. <bloomberg.com>


Industry Lobbied With Their Wallets in 2009 - The retail and fashion industries largely increased their level of spending on lobbying last year, pouring millions of dollars into influencing critical policies on trade, health care, organized retail crime, credit card fees and union organizing. Wal-Mart Stores Inc., Sears Holdings Corp., Tiffany & Co., Hanesbrands Inc., J.C. Penney Co. and Abercrombie & Fitch all boosted their spending last year on lobbying the Obama administration and Congress, according to the government’s recently released lobbying figures. Target Corp. and Limited Brands Inc. cut back on lobbying expenditures. President Obama’s signature issues, including health care reform, climate change and clean energy proposals, and financial regulatory reform all stalled in Congress last year and have been in limbo in the early part of 2010. Apparel brands, retailers and industry trade groups, opposed to many of the far-reaching policy proposals that would impose tough new regulations on the business community, saw their money spent on lobbying as a great return on investment. But there were fewer lobbying successes in the trade area, where many of the industry’s trade expansion priorities failed to lead to congressional action under a Democratic-controlled Congress and White House. <wwd.com>


Carrefour to Close 21 Belgian Stores - Citing worsening market conditions, Carrefour Belgium, a subsidiary of Carrefour SA, the world’s second-largest retailer, on Tuesday revealed plans to shutter 21 stores in Belgium. At stake are some 1,672 jobs. Carrefour outlined plans to develop its franchise business to help bail out certain hemorrhaging stores and to contribute 300 million euros, or $408 million at current exchange, over three years toward the remodeling of existing stores in line with new retail concept developments, including online initiatives. Carrefour operates 627 stores in Belgium. <wwd.com>


Japan's Jan. Exports Surge 41% - Japan’s exports surged 40.9 percent in January, providing the most recent sign that the world’s second-largest economy is recovering. The Ministry of Finance said Wednesday that exports rose to 4.9 trillion yen, or about $54.07 billion at current exchange, on increasing demand for Japanese goods from Asian countries. Specifically, exports to China, Japan’s single largest trading partner, grew 79.9 percent. Exports to the United States increased 24.2 percent. The data is good news for Japan but there are still concerns about the longer-term economic prospects for the country, in light of persistent deflation and high levels of government debt. There are also fears that Toyota’s recall crisis will dent the nation’s economic growth and tarnish its image abroad. Earlier this month, Japan's Cabinet Office said the country’s fourth-quarter gross domestic product grew a faster-than-expected 1.1 percent from the previous quarter. It advanced 4.6 percent on an annualized basis. <wwd.com


The Macau Metro Monitor, February 24th, 2010



LVS plans to open the first phase of its $5.5BN (MOP44BN) Marina Bay Sands development on April 27th. The property plans to have 963 hotel rooms, part of the shopping mall and convention center, celebrity chef restaurants along with other dining outlets and the casino to open on April 27th. The opening of the second phase (i.e. Sands SkyPark, Event Plaza along Marina Bay, various retail stops and restaurants) will coincide with the grand opening celebration on June 23rd. The two theatres and  museum are scheduled to open in October and December, respectively.


A Resorts World figure says that RWS had more than 149K visitors in its first week of operations. Although the number of high rollers remain small compared with those in Macau, locals crowded the casino, despite the S$100 entry levy. The complex's four hotels were fully booked over Lunar New Year and have enjoyed 80% occupancy at other times since the Jan 20th opening.