• run with the bulls

    get your first month

    of hedgeye free



Management stated that they were confident that domestic sales growth was returning to levels consistent with long-range outlook.  The long-range outlook commentary includes:

  • Domestic SSS of 1-3%
  • International SSS of 3-5%
  • Slight increase in cheese prices ($1.50-$1.70/lbs range)
  • New unit growth of 200-250 units
    • Returning to “net zero” domestic store growth in 2010
  • Global retail sales of 4-6%
  • FX benefit of $3 million expected for 2010
  • Advertising has been meaningfully ramped up
    • The advertising fund is now a 5.5% national fund
    • A shift is taking place to more national advertising
    • More air weeks nationally in 2010 than at any prior point [better trends come at a cost]


Interesting data points on quarter-to-date trends in 1Q10:

  • Customer counts are growing appreciably following “new and inspired” pizza launch in the last week of 4Q09
  • Management stated that it only comments on current business conditions when there is a significant change in trends – DPZ has experienced a significant change in trends
  • Marketing 101 would indicate that management would expect to see some decline over time, but it has surpassed management expectations in its ability to sustain itself
  • Outgoing CEO looks forward to joining the team, as Chairman, in a few months to report “exciting” 1Q10 results

R3: WRC - Spending on CK Underwear


March 2, 2010


There was a small but notable change in the Warnaco’s stance toward investment in its brands articulated on the company’s conference call last night. It appears that management is taking the opportunity to increase its SG&A spend in 2010, with a substantial chunk coming in the form of incremental marketing.





In the past we’ve been critical of Warnaco’s business model, which largely consists of licensed properties (about 85% of revenues come from brands the company does not own). Our criticism stemmed from our belief that that the company had been starving itself of investment spend (in the brands) while predominantly focusing on its higher margin, non-US retail expansion (CK stores are still carrying 20% four wall margins).  Spending on the brands aside, we can’t argue that this retail strategy has been working and will continue to work in the near-term as the company maintains a 20+% square footage growth rate for CK store expansion.


With that said, there was a small but notable change in the company’s stance toward investment in its brands articulated on the company’s conference call last night. It appears that management is taking the opportunity to increase its SG&A spend in 2010, with a substantial chunk coming in the form of incremental marketing. WRC will invest an additional $20 million over the course of the year, primarily to support the growth of its crown jewel, Calvin Klein Underwear. The marketing investment will drive two full campaigns, one male and one female, split over the first and second half of the year. Notably, this marks the first time CK will run two separate campaigns for the brand over the course of a year. The step-up in investment will take advertising expense to 6% of sales, a level last observed in 2008. This puts WRC right in the middle of the range of spend for other global brands.


Interestingly, this spend comes at a time when management could choose to print higher EPS in the near-term, but instead is planting the seeds for intermediate-term sustainable growth. Maybe the company is looking to improve its bargaining position with its long-rumored potential merger candidate and largest licensing partner, PVH? Either way, we applaud the reinvestment in the company’s most valuable asset and believe this subtle change in stance on spending may portend further strength to come.


R3: WRC - Spending on CK Underwear - WRC SIGMA


Eric Levine




  • Dress Barn’s CEO noted that record snowfall did have an impact on business over the past five weeks. However, with a portfolio of 2,500 stores in off-mall and mall locations, the stores in the mall substantially outperformed the chain over the snowy Valentine’s Day weekend. Despite the weather impact, same store sales are trending up 6% over the past five weeks. 
  • President Obama is expected to announce his “Cash for Caulkers” stimulus package today which is an effort to promote energy efficiency for homes AND provide job opportunities for contractors. The rebates are expected to go up to $3,000 for consumers who choose to engage in energy-saving home renovation. Interestingly, retailers will be offering the rebates up front, and will then be reimbursed directly by the government. This program along with “Cash for Appliances” is shaping up to be yet another tailwind for HD and LOW. 
  • Adidas just released its World Cup uniforms for the 12 teams it is outfitting. While the “kits” are decidedly retro, they also include the latest technology called TECHFit PowerWEB. This textile technology is designed to ensure a proper fit, promote blood flow, and store the body’s kinetic energy. The designer of the technology is describing the World Cup outfits as “uniform as equipment”. Nike is taking a different approach with its recently launched “green” uniforms made from plastic bottles found in landfills. 




Rumors Swirl Around Hilfiger - Tommy Hilfiger Corp., which has been owned for nearly four years by private equity firm Apax Partners, could be in play. According to sources, Apax has been talking to companies to gauge their interest in acquiring Hilfiger, while at the same time continuing to explore an initial public offering for the American brand, which was postponed two years ago when global stock markets began to slide. At the moment, the lead candidate to acquire Hilfiger is said to be $2.4 billion Phillips-Van Heusen Corp., which has been openly on the prowl for acquisitions and proved with its 2002 purchase of Calvin Klein that it can successfully incorporate a large global brand into its business. Both Fred Gehring, chief executive officer of Hilfiger, and Christian Stahl, partner at Apax, had no comment. Michael Shaffer, executive vice president and chief financial officer at PVH, didn’t return a phone call seeking comment. A deal with Hilfiger would give PVH not only the name, but an international network of retail stores; multiple categories of women’s, men’s and children’s businesses; an exclusive deal with Macy’s, and a strong foothold in the European and Asian markets. PVH already makes Hilfiger’s dress shirts and neckwear under license. <wwd.com>


Coach, Target Seek to Add Li & Fung Unit to Suit - Coach Inc. and Target Corp. on Friday asked a judge for permission to add a unit of Li & Fung Ltd. as a defendant in their ongoing trademark dispute. In a joint motion filed in U.S. District Court in Manhattan, both the accessories firm and mass retailer requested that Rosetti Handbags and Accessories Ltd. be named as the defendant previously known only as “Doe 1” in the case. Coach filed an infringement complaint against Target in October, alleging the discount chain had sold unauthorized copies of Coach’s Patchwork and Ergo handbag designs. At the time, the accessories maker listed up to 10 other unknown defendants it said were in part responsible for the infringement. The company said the names of those parties would be added as it discovered them. LF USA, the U.S. subsidiary of Hong Kong-based sourcing giant Li & Fung, acquired Rosetti Handbags and Accessories in 2006 for $162 million. Target filed a counterclaim against Coach in November. In court documents, the retailer asserted there is “nothing inherently distinctive” about the handbag designs in question and asked the court to find Coach’s trade dresses invalid. A representative for Li & Fung couldn’t be reached for comment Monday. If approved, the joint motion would give Rosetti Handbags until March 22 to respond to the complaint in court. <wwd.com>


Puma Buys Stake in African Ecotourism Company - Puma acquired a 20.1% stake in Botswanan ecotourism company, Wilderness Safaris, as part of its sustainability program. Puma bought its stake in Wilderness Safaris via a private placement for about 186 million Botswana Pula, a prospectus for Wilderness Safaris' planned stock market listing said. This would currently convert into $27 million. The 26-year-old company Wilderness Safaris operates camps and safaris in Botswana, Namibia, Malawi, South Africa, Zambia, Zimbabwe and the Seychelles. <sportsonesource.com>


Badgley Mischka to Expand in China - The Iconix Brand Group Inc. said Monday that Iconix China Ltd., its joint partnership with Novel Fashion Brands Ltd., has teamed with Eve NY to develop the Badgley Mischka label throughout Greater China. As part of the deal, the Shanghai-based Eve NY will manufacture and distribute Badgley Mischka Couture, Badgley Mischka Collection (which was formerly known as Platinum) and Mark & James contemporary sportswear, as well as the designers’ various accessories and bridal collections. Pricing will be comparable to domestic pricing. There are also plans to open 170 freestanding Badgley Mischka stores and concept shops in Greater China within the next five years. A flagship will bow in Beijing or Shanghai in August. During an interview Monday, Mark Badgley and James Mischka said the Asian expansion plans were not triggered by the current economic situation in the U.S. International expansion has been a priority since they first spoke with Iconix about a deal in summer 2005. Novel Fashion Brands chairman Silas Chou has also been highly supportive of Badgley Mischka’s international expansion plans, Badgley said.  <wwd.com>


A GameStop executive is moving to Wal-Mart International - Catherine R. Smith, executive vice president and chief financial officer of video game and entertainment software retailer GameStop Corp., has resigned her position to accept an undisclosed position at Wal-Mart International. GameStop announced that Robert A. Lloyd, senior vice president and chief accounting officer has been named interim chief financial officer, effective immediately. <internetretailer.com>


Columbia Taps Gaylord as President of Mountain Hardwear - Columbia Sportswear Company has appointed Topher Gaylord as president of its wholly-owned subsidiary Mountain Hardwear, Inc. As president of Mountain Hardwear, Inc., Columbia said Gaylord will be responsible for product creation, global sales and marketing of Mountain Hardwear-brand apparel, accessories & equipment, and for global sales and marketing of Montrail-brand trail-running footwear.  He will report to Mick McCormick, Columbia Sportswear's executive VP of global sales and marketing, and will relocate to Mountain Hardwear's Richmond, CA headquarters, replacing Kirk Richardson, who has served as interim president since November 2009. Gaylord, 40, joined The North Face in 1993, rising to serve as managing director of the company's EMEA region from 2000 to 2005 and as president of VF Corporation's Outdoor & Action Sports International brands, including The North Face, Vans, Reef and Jansport, from 2006 through September 2008.  Gaylord has served as president of 7 For All Mankind. Gaylord has served as president of 7 For All Mankind within VF's Contemporary Brands coalition since October 2008.  <sportsonesource.com>


Boston Apparel Group’s parent company buys Casual Living USA - Private equity firm Monomoy Capital Partners, L.P., parent company of Boston Apparel Group, has acquired direct-to-consumer women’s apparel retailer Casual Living USA. 52% of Casual Living’s sales are through its direct-mail catalogs and 48% come from via its web site. Terms of the deal were not disclosed. Monomoy plans to move Casual Living’s fulfillment, marketing, merchandising, and sourcing operations into Boston Apparel’s existing infrastructure in Massachusetts. It will also move the company’s headquarters from Tampa, Fla. to West Bridgewater, Mass. The deal marks Boston Apparel’s first acquisition since Monomoy bought the company in 2008. <internetretailer.com>


LVMH Sues Hyundai Over Super Bowl Ad - LVMH Moët Hennessy Louis Vuitton filed a trademark lawsuit against Hyundai Motor Co. on Monday, accusing the carmaker of using its toile monogram in a television ad that ran during Super Bowl XLIv. The nBC broadcast reached a record 106 million viewers. In the 30-second spot, titled “Luxury,” a voiceover asks, “What if we made luxury available to everyone?” as the camera pans past a yacht parked between single-story homes and two police officers eating caviar in a patrol car. A similar setup shows a group of men playing playground basketball using a ball with a Vuitton-like pattern stamped on its leather. The suit, filed in U.S. District Court in Manhattan, accuses the South Korean auto company of trademark infringement and dilution. Attorneys for the luxury brand said that, in using the pattern, Hyundai sought to “benefit commercially from the fame and renown of the LVM marks by creating a false association between Louis Vuitton and its automobiles.” Representatives for Hyundai did not return calls for comment. LVMH is seeking an injunction, the destruction of all copies of the commercial, legal fees and unspecified damages, among other remedies. <wwd.com


As we highlight each week, initial unemployment insurance claims have for the last six weeks been moving higher. They've broken out of the three standard deviation channel we consider an important barometer. Given that claims are starting to go in the wrong direction, we've screened the Financials universe looking for the stocks with the highest R-Squared values to initial claims. The following chart shows the 45 stocks most correlated with initial claims. For reference, our screen looked at 170 Financial companies.




A quick caveat. Are all of these stocks actually being driven by claims to the extent suggested above? The answer is clearly no. Some of these high R-Squared values seem spurious. For instance, Aflac (AFL) appears to have 85% of the movement in its stock price explained by changes in claims, yet Aflac's principal business is disability insurance in Japan. So in this case, we think the correlation is more coincidental than causal. On the other hand, Capital One (COF), which shows a R-Squared value of 0.74, has a tight connection between earnings and general levels of employment, so in this case the high R-Squared value seems appropriate.


So what do we expect out of claims going forward? Our view is that claims are likely to resume their downward trend in the coming months for two reasons. First, there were numerous reports that the snowstorms throughout January/February adversely impacted the data. This wouldn't be the first time. For instance, in January 1996 a blizzard not unlike what we experienced this past month left most of the East Coast of the United States at a standstill. In the following weeks, initial claims rose 82k to 415k from 333k, only to then drop back down in the following weeks. Second, we think the census hiring will provide a tailwind for claims on the margin, as that hiring ramps up in earnest in March, April and May. The following chart shows census staffing levels by month over the last two censuses. This census is expected to require approximately two times the number of people needed in the last census.




If we're right about claims moving lower over the next few months, we would recommend long exposure to the high R-Squared names that have also seen their stock prices drop in the last six weeks - the duration over which claims have been on the rise. The following chart shows graphically which companies may be best positioned to benefit from a recovery in claims. On the x-axis is the R-Squared to claims. On the y-axis is the percentage change in stock price since January 15, 2010 - the date of the first of six negative prints on claims.




For those uncomfortable taking a view on claims, the following are some of the names with low, or no correlation to claims.




Finally, we republish our claims chart below for reference.




Joshua Steiner, CFA





Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


Yesterday was a very strong day for the S&P 500.  The breadth of the market was very positive as every sector was up, as the S&P 500 rose 1.02% of the day.  On the bearish side volume easy down 22% day-over-day from a very snowy Friday in February. 


On the MARO front there were some positive catalysts (1) reports of a new rescue package for Greece benefited the RISK trade, (2) strategic M&A activity continued (3) a strong earnings season and (4) better-than-expected January spending data.  All of this was good for the dollar index, which was up 0.37% on the day.  Today’s set up of the Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (80.26) and sell Trade (80.97).


On the negative side a below-consensus 56.5 reading on the February ISM, along with declines in the forward-looking new orders and production components, seemed to be set aside by an improvement in the employment component to 56.1 from 53.3.


In return for support from other member nations, Greece is expected to announce on Wednesday that it has agreed to implement new austerity measures. The news helped underpin global equities and a number of pockets of the risk trade.  The unwinding of the RISK trade can be seen in the VIX, which is broken on all three durations – TRADE, TREND, and TAIL.  The VIX declining 1.23% yesterday and today’s setup of the Hedgeye Risk Management models have levels for the volatility Index (VIX) at:  buy Trade (18.79) and sell Trade (22.01). 


All year long strategic M&A has continued to offer a tailwind for stocks.  Yesterday, MIL agreed to be acquired by MRK for roughly $6B in cash, while AIG +4.1% rallied after announcing the sale of its Asian life insurance business to PRU $35.5B. In addition, MXB (4.6%) said that it had agreed to acquire RISK in a deal valued at $1.5B.


Yesterday, the best performing sector was Consumer Discretionary.  Continuing it three week outperformance on the back of better-than-expected Q4 earnings and 2010 outlook, retail was the biggest contributor to the outperformance; the S&P Retail Index was up  1.6% on the day.  The positive trend in consumer spending got off to a strong start in 2010, rising 0.5% in January, with real spending up 0.3% and running at a 3.3% annualized rate thus far in 2010.


We are currently bullish on Technology and long the XLK.  Yesterday, the Semis lead tech higher with the SOX +3.1%. The bulk of the move was attributed to SNDK which was up 11.9%, which boosted its Q1 guidance at last Friday's analyst day, while also noting that it expects F10 revenue to come in at the upper end of its forecasted range.  An additional tailwind for the semis came from January global semiconductor sales data from the SIA, along with upwardly revised fiscal Q2 guidance from SWKS.


We are also long the Financials (XLF), but they lagged the broader index yesterday.  After outperforming in a down week last week, the banking group was weaker on the day with the BKX (0.4%).   There was not a lot of news flow yesterday to point to the decline.  


As we wake up today, Equity futures are trading above fair value and at session highs on anticipation the EU will agree to an aid package for Greece.   It’s a quiet day for economic data points today; we will get API Crude Inventories, ABC Consumer Confidence, and February domestic Vehicle Sales will be reported throughout the day.  As we look at today’s set up, the range for the S&P 500 is 19 points or 1% (1,103) downside and 1.0% (1,122) upside. 


Copper fell from the highest in more than five weeks in London as mines reopened in Chile after a magnitude-8.8 earthquake halted operations and the dollar rallied.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.18) and Sell Trade (3.39).


In early trading gold is unchanged.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,096) and Sell Trade (1,124).


In early trading OIL is trading above $79.00.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (77.12) and Sell Trade (80.91).


Howard Penney

Managing Director


US STRATEGY - QUIET and to the UPSIDE - sp1


US STRATEGY - QUIET and to the UPSIDE - usd2


US STRATEGY - QUIET and to the UPSIDE - vix3


US STRATEGY - QUIET and to the UPSIDE - oil4


US STRATEGY - QUIET and to the UPSIDE - gold5


US STRATEGY - QUIET and to the UPSIDE - copper6


Selling The Freakout!

“Art is making something out of nothing and selling it.”

-Frank Zappa


Frank Zappa was an iconoclastic musician who wrote all of the lyrics to his own songs. He was a critic of mainstream groupthink. He was a father of four. He was an American success story who understood how to make the passionate sale.


In 1966, Zappa and his band, The Mothers of Invention, released their debut album, “Freak Out!” You know I love that album’s name as much as I loved Zappa’s facial hair. Zappa had a great firefighter’s ‘stache. He could have easily doubled as Al Nicholls in Slapshot (Captain of the Charlestown Chiefs).


The art of risk management is “making something out of nothing and selling it” when the Manic Media is having their little Freakouts. We’ve talked about the efficacy of Selling Fear and shopping You Tube videos of empty Chinese cities to your local trading desks – when it’s consensus, these aren’t very effective short selling strategies.


With Greece up +3% and the SP500 up +1%, global stock markets put on quite a show yesterday. Short sellers from Athens to Albany got run-over old-time hockey style. Sorry wanna-be short sellers, the pros are playing this game now and this is what happens when you are Selling The Freakout!


Back in my day, I wasn’t afraid to dawn the cut-off jean shorts on Yale’s campus, so I can assure you that changing my mind from the long to the short side of a market isn’t a conceptual problem. Having a pair of scissors is sometimes all it takes when you want to make art out your Canadian denim portfolio.


Covering your shorts can be both a figurative and mathematical exercise. It all depends on where your goods are positioned before the tide rolls out. Every short position is a liability. Never forget that, or the water level will forget you. Gains on the short side are meant to be taken.


As opposed to some of the unaccountable 2009 short selling artists formerly known as Depressionistas, I have an investment portal where I can change my tunes real-time. It’s not iTunes, but it seems to work. Sometimes I’m buying. Sometimes I’m selling. It’s all virtual – and I’m cool with that too.


Currently I have 11 short positions in the Virtual Portfolio. On strength yesterday, I shorted the Russell 2000 (IWM) smaller cap index into the market’s close. We professional short sellers call this the ole hedge in the Hedgeye.


Zappa’s “Freak Out!” is frequently cited as one of America’s first “concept albums” (unified by a theme), and I think that’s a good way to think about how a global macro risk manager makes intraday moves. I start every investment quarter (every 3 months) with 3 Macro Themes. This quarter, those themes have been:

  1. Buck Breakout (long the US Dollar (UUP); short gold, GLD )
  2. Rate Run-up (bearish on long term US Treasuries – short IEF)
  3. Chinese Ox In A Box (we have covered our short position in Chinese equities, CAF)

Like a musician, I wake up repeating these themes over and over again, until I think I have it right. Sometimes, I wake up realizing that I either have it wrong, or that I am about to get it wrong. So I stop the music, and start over. Why be wed to your own lyrics when you can just change them?


Of our 3 Macro Themes for Q1 of 2010, the one that’s most likely to turn on me is the 3rd one – Chinese Ox In A Box. Rather than overstay my bearish welcome,  I have already started to transition my team to focusing on where we could go wrong in staying negative on China. Consensus is clearly starting to Sell The Freakout!


Here are some Chinese lyrics from Mr. Macro Market that we are listening to:

  1. China rallied +1.2% yesterday on a horrible (but proactively predictable) Producer Manufacturing (PMI) print of 52 (vs. 55.8 last month)
  2. Chinese stocks then traded down -0.48% last night, but made another higher-low
  3. The Shanghai Composite closed at 3073 and, critically, that’s held my immediate term TRADE line of support at 3041

On their own, these one liners are less-bearish. Collectively, they may start singing a song that’s outright bullish. Stay tuned. The art of risk management is that the music is always changing. After all, Selling The Freakout isn’t a unique idea. Zappa started doing that in 1966.


My immediate term TRADE lines of support and resistance for the SP500 are now 1103 (which is also the intermediate term TREND line of support) and 1122, respectively.


Best of luck out there today,





FXC – CurrencyShares Canadian Dollar — Canada's currency was on sale on 2/25/10 and we are bullish on the Loonie's long term TAIL, at a price. Look for rate hikes in Canada in the coming 6-9 months.


XLF – SPDR Financials — With sentiment negative and a Piggy Banker Spread hitting a record wide spread on 2/23/10, we bought red.


XLK – SPDR Technology — Technology is underperforming the SP500 YTD; a down day on 2/22/10 prompted us to buy more. We expect to see some positive mean reversion for Technology as M&A picks up.


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.



IWM – iShares Russell 2000With the Russell 2000 finally overbought from an immediate term TRADE perspective on 3/1/10, we got the entry price that the risk manager makes a sale on strength.


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.


XLP – SPDR Consumer StaplesGiven how many investors own Consumer Staples 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.


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, March 2, 2010


GAMING REVENUE RISE macaubusiness.com, MacauNews

According to Lusa and the Macau Post Daily, the Macau gaming market generated revenues of ~13.4-13.5 billion MOP for the month of February, an increase of ~69-70% YoY and a decline of ~3.6% sequentially. February 2010 set a new record for gaming revenues in one day--more than MOP1 billion. As for market share, SJM continues to lead with 32%; LVS had 20%; WYNN had 15%; MPEL had 14%; Galaxy had 10%; and MGM Grand Paradise had 9% of the market share.