This morning we got a reprieve on the claims front and added tailwind out of February retail sales. Initial unemployment claims fell 29k last week to 469k from 498k the week prior (revised up 2k). Consequently, the 4-week rolling claims number dropped 3.5k to 470.8k from 474.3k.


This latest print, while positive on the margin, isn't enough to keep to push claims back into our 3 standard deviation channel. As pointed out a few days ago in our report analyzing companies' correlation with claims we expect claims to move lower, back into our 3 sigma channel in the coming months. Weather was an aberration in February, which caused claims to be artificially high. Moreover, going forward, we expect Census hiring to begin to exert downward pressure on claims this month and lasting through May/June. 




Separately, February retail sales numbers are out this morning, and our retail analyst Brian McGough thinks they are much stronger than expected, and would have been even stronger without the heavy February snowfall totals. This bodes well principally for volume/transaction-based companies like AXP, MA, V and to a lesser extent DFS.


Joshua Steiner, CFA

R3: Happy New Fiscal Year!


March 4, 2010


This morning’s same-store sales results confirm the positive commentary that has been trickling out of earnings calls over the past couple of weeks.  February was a strong month.  Yes, compares were easy, but the results stand out especially in light of record snowfall-induced disruptions for most retailers.  





This morning’s same-store sales results confirm the positive commentary that has been trickling out of earnings calls over the past couple of weeks.  February was a strong month.  Yes, compares were easy, but the results stand out especially in light of record snowfall-induced disruptions for most retailers.  On an overall group basis, monthly performance improved across the 1, 2, and 3 year time frames.  For the first time in over a year, the 2 and 3 year stacked trends turned positive.  While this is certainly a better than expected start to the fiscal year for almost every retailer, its important to note what lies ahead.  Momentum will continue to improve sequentially based on continued easy comparisons and the Easter calendar shift, which will give March an added boost.  The question now is not if sales momentum will remain, but rather where already high expectations are heading.  To support an improving trend, we do believe we’ll begin to see inventory commitments creep up. Otherwise  we are getting closer and closer to a point where topline opportunities may begin to be missed in a more meaningful way.


February Recap:



In-line: KSS

Slight downside to expectations: SKS, BONT


R3: Happy New Fiscal Year!  - SSS 1 year total


R3: Happy New Fiscal Year!  - SSS 2 year Feb


Eric Levine




  • BJ’s Wholesale management indicated that severe deflation in perishables resulted in the category reporting its lowest comparable store sales of the year. Despite the severe inflation, unit comps increased more than offset pricing, which led to a 3% increase for the quarter. While deflation overall put pressure on the topline, management believes at it cycles last year’s price declines in 2Q, the topline will begin to improve. Overall, the company estimates deflation had a 250-300bps impact on fourth quarter sales. 
  • Keep an eye out for the latest YouTube/ viral social media trend to hit the world of retailing. Dubbed “haul videos”, these short videos are on-camera recaps of shopping trips. In other words, a young women goes to the mall, comes home, sets up her camera or webcam, and reports on her shopping trip and what she came home with. And to demonstrate the power of YouTube, the most popular “haul video” has now recorded 580,000 hits! With that many views, this a trend that is likely here stay for at least a little while… 
  • Costco noted that closings of Sam’s Club locations that are in the same trade areas as their own stores should positively impact 7 or 8 units. Interestingly, the positive impact is likely to come in the form of better margins. The elimination of Sam’s as a direct competitor within a specific trade area allows Costco be slightly less aggressive on pricing, especially on highly visible and price sensitive items. 




Kohl's to Add Nine New Stores, 1,500 Jobs - This spring, Kohl's plans to open nine new stores in five states, creating more than 1,500 jobs. The retailer expects to open a total of approximately 30 stores by the end of the year. Kohl's nine new stores will be located in Maryland, New York, Oregon and Pennsylvania. In addition, the retailer plans to remodel 85 stores this year. "We continue to bring customers new stores where they can enjoy Kohl's great brands and tremendous values and invest in our existing store base—remodeling 85 stores, 66 percent more stores than last year—to keep the customer experience fresh and exciting," says Kevin Mansell, Kohl's chairman, president and chief executive officer. Kohl's currently operates 1,067 stores in 49 states. Licensed product lines found at the retailer include Simply Vera Vera Wang, Food Network, LC Lauren Conrad and Avril Lavigne's Abbey Dawn. <>


Macy's Prepares Exclusive Brand Launches for Spring - Four new fashion brands and two home line expansions will roll out this month and April exclusively at Macy's. The new fashion brands include Ellen Tracy for women's better sportswear, Kouture by Kimora for young trendsetter apparel, Threads & Heirs for men's casualwear and mstylelab for jewelry and hair accessories for young contemporary consumers. The home line expansions include multiple mattress styles for the Martha Stewart Collection and casual Latin-inspired dinnerware for Vida for España by Eva Mendes. In other Macy's news, the latest Kenneth Cole Reaction men's sportswear line will be available exclusively this fall at stores within the U.S. and its territories. The men's collection will include denim, graphic tees and woven shirts—all targeting a young, casual and price-conscious demographic. The sportswear will initially hit 150 Macy's stores and online at in September. The in-store rollout will see the apparel in Reaction-themed, shop-within-a-shop concepts. A further 550 store launch will follow. The sportswear range builds upon Macy's current Kenneth Cole Reaction offerings such as footwear, outerwear, tailored clothing, dress shirts and ties, pants, bags and luggage, small leather goods, belts, men's jewelry, sunglasses and fragrance. <>


Heelys Fills Positions to Support 2010 Business Plan - Heelys announced several staff changes to support their 2010 business plan, which includes revitaling its brand, making new products a priority and improving partnerships with retailers, marketers, licensers and the media. Ryan Wills has been promoted to Director of Innovation. His primary responsibilities will be driving new product design and development. He will also work across the board with the marketing group to create packaging, in-store merchandising materials and communications programs for these new products. Chris Harper has been promoted to Vice President of Sales and Retail Relationships. In this role Harper will build on his previous retail responsibilities and will work directly with retailers to build specific sales programs as well as product and promotional concepts to drive sales in their particular stores. In doing so he will work closely with Heelys' outside sales representatives, customer service, marketing and product development to ensure that retailers have what they need to succeed with the Heelys brand. <>


Congress Grills Kirk on Exports - Senators voiced bipartisan skepticism about President Obama’s initiative to double exports in five years, pressing U.S. Trade Representative Ron Kirk at a hearing Wednesday for details on how the administration could achieve such an ambitious goal. Kirk was questioned as House Ways & Means chairman Charles Rangel (D., N.Y.), a champion of trade benefits for developing countries, said he was temporarily stepping down from his powerful post. Rangel’s decision came after the House ethics committee admonished him for taking corporate-sponsored trips to a Caribbean conference. He is also the focus of a broader ethics investigation. Initiatives to overhaul U.S. trade preference programs and a bill to renew tariff breaks on imported products that expired last year, with an adverse impact on apparel and textile companies, face new uncertainty without Rangel’s muscle to push them through the committee, which controls legislation on taxes and trade. It was unclear whether Rangel, who kept his seat on the committee, will be able to regain the chairmanship or who would replace him in the interim. The most senior Democrat on the committee is Rep. Fortney “Pete” Stark of California.  <>

Fed Report Shows Slow Retail Pickup - The retail outlook in most parts of the U.S. improved mildly in late January and throughout February despite the impact of heavy snowstorms and continued economic pressure from high unemployment rates, according to the Federal Reserve Board’s Beige Book, released Wednesday. Several districts in the Fed’s report said the severe snowstorms in early February “held back” some sales, but retailers were still able to meet expectations for the month. The anecdotal report from the Fed said retailers in most of the 12 districts tracked for the Beige Book noted that sales were strongest for lower-priced items and that sales of luxury items were still sluggish as the economy slowly climbs out of a deep recession. A major snowstorm blanketed regions in the U.S. in the first weeks of February. Retailers in New York attributed slowdowns for some chains to wintry weather, noting sales in areas with less inclement conditions were stronger than expected. Philadelphia retailers reported that the weather in February offset a mild trend of increased sales for the month. Some regions reported sales rebounds after the storms, as consumers succumbed to “cabin fever” and ventured out to go shopping when roads were clear, but retailers in Richmond noted the occurrence of back-to-back storms in that region on consecutive weekends made it hard to recover all the sales that were lost.  <


Underemployment 19.8% in February, on Par With January - Gallup Daily tracking finds that 19.8% of the U.S. workforce was underemployed in February, on par with January's 19.9% reading.

 R3: Happy New Fiscal Year!  - G1

"Hope for finding a job remained flat in February: 40% of the underemployed were hopeful that they would find a job in the next four weeks, compared to 39% in January." These results are based on February interviews with more than 19,000 adults in the U.S. workforce, aged 18 and older. Gallup classifiesrespondents as "employed" if they are employed full time or are employed part time but do not want to work full time. Gallup classifies respondents as "underemployed" if they are employed part time but want to work full time or are unemployed. Unemployed respondents are not employed, looking for work, and available for work. February's 19.8% underemployed estimate includes 10.6% who are unemployed and 9.2% who are working part time but wanting full-time employment (neither estimate is seasonally adjusted, and both are based on adults 18 and older). Both figures are similar to January's estimates.

 R3: Happy New Fiscal Year!  - G2

Although Gallup's data trend closely with figures put out by the U.S. government's Bureau of Labor Statistics, there are important methodological differences between how Gallup calculates and how the government calculates its estimates. For example, the Bureau of Labor Statistics reports a seasonally adjusted unemployment rate for the U.S. workforce aged 16 and older. Gallup data are not seasonally adjusted and are based on respondents aged 18 and older. <>


Because things are the way they are, things will not stay the way they are.
- Bertolt Brecht


US equities finished little changed on Wednesday after being in positive territory for most of the day -  Dow (0.09%), S&P +0.04%, Nasdaq 0.00%, Russell 2000 +0.15%.


On the MACRO front the developments out of the Eurozone were net positive, as the risk trade was underpinned by the news from Greece.  The dollar index experienced its worst decline since December 2, 2009 and has now fallen of the last six days.  Today’s set up of the Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (79.92) and sell Trade (81.09)

The ISM non-manufacturing index did push further into expansionary territory last month, rising to its best level since October of 2007. The ISM Non-Manufacturing report delivers yet another blow to narrative fallacy of those forecasting a 2010 “double-dip” and the Fed maintaining rates at zero in perpetuity. 


The VIX declined 1.2% yesterday and today’s setup of the Hedgeye Risk Management models have levels for the volatility Index (VIX) at:  buy Trade (18.37) and sell Trade (21.26).  The VIX continues to be broken on all three durations - TRADE TREND and TAIL.


Yesterday’s Dollar weaknesses lead to commodity-related equities outperforming.  The two best performing sectors yesterday were Materials (XLB) and Energy (XLE).  Rounding out the top three performing sectors was Consumer Discretionary.  While the retail group was little changed ahead of today’s February same-store sales data, Ford, CBS and APOL helped drive the index higher. 


Yesterday, there were two sectors that were down on the day - Utilities (XLU) and Healthcare (XLV).  The increased concern surrounding the use of the reconciliation process to pass healthcare reform was a major source of weakness for Healthcare group.  Within the XLV, managed care group extended its recent outperformance with the HMO +0.9%.


As we wake up today, equity futures are trading modestly below fair value in a continuation of yesterday's late day sell off.  Greece is still very much in the headlines as it launched a 10-years bond issue. 


On the MACRO calendar today we have;

  • February retail sales
  • Q4 Nonfarm Productivity,
  • Unit Labor Costs and Initial Claims
  • January Factory Orders,
  • January Pending Home Sales
  • Natural Gas Inventories
  • MBA Mortgage Apps

As we look at today’s set up the range for the S&P 500 is 15 points or 1% (1,108) downside and 0.4% (1,123) upside. 


In early trading copper fell for the first time in five days as the dollar is rebounding from yesterday’s sell off.   The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.32) and Sell Trade (3.47).


After rising for five straight days, Gold is trading lower on dollar strength.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,121) and Sell Trade (1,142).


Crude fell for the first time in three days as the dollar strengthened and increased inventories.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (79.59) and Sell Trade (81.21).


Howard Penney

Managing Director














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Extremely Improbable Events

“We can't solve problems by using the same kind of thinking we used when we created them.”

-Albert Einstein


We have been in a recession since December 2007 and what has changed?  Ok, George Bush is no longer in office, but Barack Obama has not been able to solve anything, largely due to a screwed up political system and corrupt politicians.  That’s the obvious answer…. 


The financial crisis was born out of a pattern of accumulating hidden risks in the system, coupled with an increasing complexity of the financial system around the world.  Never before have we had so much complexity and so much ignorance as to what is going on.  After more than two years of trying to fix the system, some corporations are slightly better off, but the reality is that nothing has changed.


For the last two days I have found myself writing about structural problems which are hard to ignore, and some are worse than others. 


First, 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. 


Second, the most recently revised GDP report revealed another structural problem as current trends are not sustainable.  Private inventory growth accounted for 4%, or 67%, of the revised 5.9% annualized growth in 4Q GDP.  


Third, Washington has dug a very big hole and there is no real insight on how to deal with the issues, and now the politicians and Washington’s “Groupthink” is begetting speculation that is potentially unhealthy.   More importantly, the federal government or “the system” appears to be accumulating more hidden risks which could end up leading to an “extreme improbable event.”  At Hedgeye Risk Management, we call that “TAIL” risk. 


As a financial analyst, I have learned that all of the real juicy stuff can be found in a company’s footnotes.  I’m not claiming to have read all of the 2009 Financial Report of the U.S. Government, but the footnotes and the statement of the comptroller general of the United States are alarming.  Anybody reading them would come to the conclusion that the US government is a short. 


Consider the report’s covering Statement of the Comptroller of the United States, the overseeing accounting authority, where "material" questions are raised in terms of the valuation of the bailout liabilities and assets.  According to, Gene L. Dodaro, Acting Comptroller General:


"The economic recession and the federal government’s unprecedented actions intended to stabilize the financial markets and to promote economic recovery have significantly affected the federal government’s financial condition. The resulting substantial investments and increases in liabilities, net operating cost, the unified budget deficit, and debt held by the public are reported in the U.S. government’s consolidated financial statements for fiscal year 2009. Because the valuation of these assets and liabilities is based on assumptions and estimates that are inherently subject to substantial uncertainty arising from the uniqueness of certain transactions and the likelihood of future changes in general economic, regulatory, and market conditions, actual results may be materially different from the reported amounts. Further, the ultimate cost of these actions and their impact on the federal government’s financial condition will not be known for some time."


Or how about this one….


“Certain material weaknesses in internal control over financial reporting and other limitations on the scope of our work resulted in conditions that prevented us from expressing an opinion on the fiscal year 2009 and 2008 financial statements other than the Statements of Social Insurance. “


The internal controls of the US Government are so bad the books can’t have an official opinion from the Comptroller of the United States. 


The US government is spending money it does not have, it can’t balance the books and the most read story on Bloomberg over the past eight hours is “Germany Snubs Greek Aid Plea as Protest Snarls Athens Traffic.”


How Germany and the EU end up dealing with Greece has broad implications for the other troubled countries in Europe.  I get that.  Europe has a real big problem and it’s called leverage and leverage is bad.  The US has a leverage problem too and we don’t have the internal controls to know where all the problems are.  The US fiscal issues don’t stop with the US government as there are many individual states (see for the details) that are nearly bankrupt and have funding issues too. 


Despite the current policies of the US government, the willingness of foreigners to fund our problems has been unwavering.  However, it’s worth note that yesterday the Dollar Index experienced its biggest one day drop since December 1, 2009 and has now fallen five of the last six days.  Unfortunately, it’s seems that the US could be headed toward one of those extreme improbable events.    


When a company can’t balance its books that is a real problem, but it’s ok for the US government to not have a handle on the numbers?  Something does not add up.


Wishing Keith and his family all the best today!


Function in disaster; finish in style!


Howard Penney
Managing Director




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.



EWP – iShares SpainThe etf bounced on 3/3/10 in part from a strong day from Banco Santander, the fund’s largest holding in the Financials-heavy (43.8%) etf. We shorted Spain for a TRADE, and have a bearish bias on the country. Massive unemployment, public and private debt leverage, and a failed housing market remain fundamental concerns.


IWM – iShares Russell 2000With the Russell 2000 finally overbought from an immediate term TRADE perspective on 3/1/10 and added to it on 3/2; 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 Staples Another capitulation squeeze is in full motion for the short sellers of everything "consumer". Shorting green as inflation starts to creep into the system again.


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 4th, 2010



 During an interview with Bloomberg, MGM CEO Jim Murren said, "I'm confident we'll get the IPO done in the third quarter, probably in the August, September time frame." Murren also mentioned that the sale of $850 million in secured bonds between now and June would will give MGM a more flexible time frame on its debt in the near term. 


In advance of Great Canadian’s Q4 earnings release on Monday, we’ve summarized management’s forward looking statements from last quarter.



General Trends

  • The weakened economy continues to impact our markets”
  • “We believe that the cost structure that we have in place right now is appropriate for the revenues that we have but, you know, if revenues go up, certainly some of our costs will go up.  But the margin, margins will continue to grow as those revenues come back.”
  • “You know, unemployment in the Province of British Columbia has still been climbing – that’s where three quarters of our revenues are – and so we are continuing to prepare for the worst and it’s that conservative attitude that’s brought us into this position and that’s the way we’re going to continue to operate.”


Project updates & Outlook

  • Re: Georgian Downs “These new offerings have been well received so far.  We are confident that they will provide further evidence of the underserved nature of a good deal of the Ontario market.”
  • To date, results from the Canada Line have been promising.  Initial ridership has exceeded TransLink’s expectations and River Rock has witnessed increases, both in visitation and slot play.  While slot coin in for the third quarter still declined by 5 percent when compared to last year, it grew by 11 percent when compared to the second quarter of this year.  That sequential increase was not something we witnessed in 2008 and is an encouraging indicator of what River Rock may deliver going forward.”
  • On November 19th, we’ll complete the second phase of upgrades to the facility.  These include the renovated atrium, the elevated walkway that will connect the existing facility to the Canada Line station and a variety of enhanced amenities.  Furthermore, it will wrap up construction, ending the disruption that’s inconvenienced River Rock’s patrons for the past 18 months.”
  • “At Boulevard and River Rock, we will perform comprehensive overhauls of the layout of our gaming floors.  These modifications will both highlight the upgraded slot product at these facilities and increase their capacity.  Boulevard will feature 1,000 slot machines, while River Rock will feature slightly more than that.  Both casinos’ layout changes will be complete by the end of 2009 and will improve the alignment of their properties’ offerings with our patrons’ wishes.”
  • “For a historical note, River Rock hasn’t had any new product in there since we opened the doors….2004”
  • “At River Rock some of the slots that are going to be removed might produce as little as $50 a day and some of the ones that we might want to add more of produce well over $1,000 a day so that’s the kind of metric (unintelligible) slot machines (inaudible) and so the exercise is to get productivity up and get the non-producers out of there”

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