I understand the math behind Keith’s thoughts that Ben Bernanke (aka “He who sees no bubbles”) needs to raise interest rates and maybe he did what he needed to do to keep his job.   


Maybe the question for Ben is not whether he should raise rates, but rather, whether he can raise rates as he continues to behave as though he has a serious problem.  Maybe Ben is aware of another problem that is preventing him from raising rates (outside of political pandering).  The notion that his behavior is consistent with someone who has a serious problem suggests that going forward the “economic” character of the market could surprise to the down side.  If this is true, the FED will raise rates when Ben’s “problem” no longer exists, which plays into the belief that the market will rally in response to a rate increase.  Not raising rates may lead to a new set of problems, but we will cross that bridge when we come to it. 


Recent surprises in weaker home sales, new jobless claims and declining consumer confidence have not been of any consequence to the market.  Are we being set up?  The complacency surrounding the market reactions to those numbers should not be lost.  Will the market continue to shrug off disappointing news as the general outlook shifts, from one of ongoing economic growth, to one of slowing growth and the possibility of a renewed recession?


Consumers account for more than 70% of GDP, yet growth in personal consumption cannot be sustained without growth in inflation-adjusted income.  Short-term benefits can be gained through debt expansion, but consumer credit continues to contract, and disposable consumer income is not keeping up with inflation.  This is a long-term structural problem, and, until it is addressed, there can be no sustained economic recovery. 


The most recently revised GDP report revealed another structural problem as currents trends are not sustainable.  Private inventory growth accounted for 4%, or 67%, of the revised 5.9% annualized growth in 4Q GDP.  That was up from 3.6%, or 63.0%, of the 5.7% reported initially. 


Again, without end demand, the buildup in inventories could be more detrimental to GDP going forward than the benefit it provided during the fourth quarter. 


Keith’s criticism of Ben Bernanke is well grounded, as the data is now in Keith’s favor.  The only reason the FED chairman can ignore the facts is because he has a problem, and if he has a problem, we all have a problem…  


Howard Penney

Managing Director


PROBLEM BEHAVIOR - chained PCE vs Income



In the last few days, President Obama’s approval rating has touched the lowest levels of his presidency.  According to the Rasmussen Daily Tracking Poll, on February 27th, 2010 President Obama was ranked a -21 on the Presidential Approval Index, which is the delta between Strongly Approve and Strongly Disapprove.  This tied his prior lowest rating on this poll, which occurred back on December 22, 2009.  While the President did see a slight bounce in early February, his approval rating for most of 2010 has been quite dismal.


Based on the Real Clear Politics poll average, the spread between approve and disapprove is +1.7, still demonstrating a positive spread in approval.  That said, the approval portion of this rating is 48.2, which is just slightly above the 2/20/10 low of 47.1, and still near the lowest of his presidency.  As we get nearer to midterm elections, with no bounce in Presidential approval seeming likely, it becomes more and more clear that the Republicans will take back some serious ground in November and perhaps reclaim both houses.


But, stepping back for a second, what has happened to President Obama?  Even we, which in hindsight were dead wrong, compared President Obama to FDR and had high expectations.  In the spirit of YouTubing ourselves we wrote back on 1/20/2009:


“Once inaugurated, FDR did not waste his popularity or the political capital that the election had bestowed on him. In his first 100 days, from roughly March 9 to June 16th, 1933, FDR sent an unprecedented number of bills to Congress, which all passed easily. Among the major bills that were passed by Congress during this time period were the bill that created the Federal Emergency Relief Administration, the Civilian Conservative Corps, the Reconstruction Finance Corporation, and the Tennessee Valley Authority. Congress also gave the Federal Trade Commission broad new regulatory powers and provided mortgage relief to millions of farmers and owners . . .


President Obama has followed this advice well. He has formed a solid economic battalion in the way of Summers, Geithner, and Volcker (to name three) and is charging forward with a large and broad based recovery plan. Even the most partisan of Republicans will have a hard time not supporting President Obama over the next 100 days.”


We were wrong on many accounts based on this statement, but most notably President Obama has turned out to be anything but FDR.  He has passed limited legislation and has been ineffective at utilizing his well regarded communication skills to maintain his approval ratings.  In very quick fashion it appears, also, that he has lost the support of the very independents that elected him.


On our Morning Call today our Healthcare Sector Head, Tom Tobin, suggested he was seeing a shift in momentum for President Obama.  A bounce, if you will.  Below we have attached a chart of the Rasmussen President Daily Tracking Poll and the Real Clear Politics Presidential Poll Average.  If one questions jumps out at us it is this: Where, Mr. Tobin, is this bounce?


The fact is, there is no bounce and the longer that President Obama’s approval numbers remain mired at these low levels, the worst for Democrats in the upcoming midterm elections.  Ultimately though, as it usually is, a deadlocked Washington may well be a positive catalyst for the stock market.  So as we begin looking towards the November midterms, and it begins to seem more and more likely that the Republicans will take back one house if not both, the impact on the stock market may be positive.


According to the Stock Trader's Almanac, a popular reference book on Wall Street, since 1949, “the Dow has gone up by an annual average of 19.5% when the White House was Democratic and Congress was Republican.”  A Democratic President and a Republican Congress is by far the best performing congressional combination for stock market performance based on history.  Obviously this is but one factor that will influence stock market performance, but with history as a guide we will certainly be focused on the potential for the midterms to provide a market catalyst.


Daryl G. Jones

Managing Director


Bounce? - pres1


Bounce? - pres2





"The stabilizing trends we've noted previously continued during the fourth quarter, and we were especially encouraged by our Las Vegas Locals business, which showed sequential improvement from the third quarter. Visitation to the city continues to grow, reflecting the popularity of Las Vegas as a destination. As the economic recovery accelerates, consumer spending will increase, providing us the opportunity to capitalize on our more efficient business model."

- Keith Smith, President and Chief Executive Officer of Boyd Gaming



  • "We saw stable visitation at our properties in the Las Vegas Valley, but continued to be impacted by depressed consumer discretionary spending."
  • "Stronger operating results at our three downtown properties were offset by lower pricing and higher fuel costs associated with our Hawaiian charter service."
  • "In Indiana, Blue Chip reported solid year-over-year growth, which was offset by previously anticipated weakness at our southern Louisiana properties."
  • "Borgata was able to maintain Adjusted EBITDA at prior-year levels despite the impact of severe winter weather in December."


  • Seeing early signs that the recovery is underway in Las Vegas, and the recovery of the Strip is vital to their locals market economy
  • Had the first sequential quarterly improvement in the locals business, for the first time in 18 months and are seeing those trends continue into the 1Q2010
  • Continue to look for attractive long term growth opportunities - primarily STN casinos
    • Even if STN's agreement with lenders comes to fruition, there will still be a number of their assets up for sale and they would be interested buyers
  • Will monitor MGM's divestiture process closely; BYD has the right of first refusal
  • Las Vegas locals region:
    • Business trends are finally improving on the strip - (really? I thought they were just getting less bad)
    • Saw a moderation of promotional spending in the 4th quarter and that trend has continued into the first quarter
  • Downtown region:
    • As many customer packages are purchased months in advance, they didn't reflect the rising fuel prices, and that negatively impacted them
    • Their share of the downtown market rose to 1/3
  • Midwest & South
    • Decline was due to declines in Louisiana. Lake Charles market was benefiting from hurricane money - which has finally run out.  Louisiana and Texas job markets have also softened (Delta Downs & Treasure chest)
    • Blue Chip did well, drawing more business from the Chicago market
    • Expecting similar y-o-y comparison in the 1Q2010
  • Borgata
    • If not for weather issues, they would have had $5MM more of EBITDA and revenue growth
    • Bad weather has continued into the 1st quarter - and the impact will be over $5MM of EBITDA as three weekends have been negatively affected by weather
  • Expect y-o-y declines in their results to continue to narrow in 2010
  • Leverage was 6.2x vs a 6.5x covenant
  • Their $1BN R/C availability is enough to complete any of the M&A pursuits (ie. STN's acquisition)
  • $1.8MM one time charge was recorded as interest expense in relation to the early reduction of the R/C capacity which resulted from their credit expansion
  • Pre-opening expense was entirely related to Echelon, no capitalized interest
  • Once the NJ commission allows MGM to move forward with the sale of their share of Borgata, BYD will have to consolidate their results


  • Echelon will have on-going minimal costs included in pre-opening expenses.  Will wind down to just security and site maintenance post 1H2010
  • Any other properties have weather hits? No - Midwest has had normal weather
  • Recap of Borgata?
    • They are looking at it - especially since the existing credit facility expires in 2011
  • Las Vegas locals trends are across the board with the Coast properties & Boulder Strip
  • Tax benefit in the quarter?
    • 4Q is always an anomaly because that's when they true up. Expect run rate tax rate to be 38% in 2010
  • Do they have any more room to cut costs at the property level? Just more rational marketing from their competition
    • A number of their competitors were spending a lot in Southwest Louisiana and the easing of that in the 1Q2010 will benefit them
  • Capex and Corporate for 2010?
    • Corporate shouldn't be much different than 2009 levels. For Capex they have a little left on wrapping up Echelon that has already been spent but needs to be paid ($25-30MM) plus another $50-55MM of maintenance
  • Don't need to contemplate issuing equity
  • VLT's at the Meadowlands?
    • Do not want to see that happen and are fighting it
    • It is a legislative issue that needs to pass a bill to get approved
  • Have been planning for the impact of table games in PA for a while.  Will likely step up market. Think that they are more of a destination market than the PA assets. They have much better amenities than PA, even with table games
    • We think they will obviously get hit - despite the better amenities
  • Because the debtor has a period of exclusivity (STN), they haven't been spending a lot of money on this effort

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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. <>


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. <>


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. <>


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.  <>


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. <>


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.  <>


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. <>


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. <


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





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