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German Factory Orders Surprise to Upside

Position: Short Spain via the etf EWP


German Factory Orders rocketed to the upside on an annual basis by 19.6% in January, yet it’s worth noting that the comparison is on -36.8% in January ’09, which marked the bottom in manufacturing orders (see chart below). On a 2-year monthly average the data shows an accelerating improvement from December (-10.45%) to January (-8.6%) versus November (-11.05%). The improving trend in 2009 was aided by government stimulus measures, including the country’s successful cash-for-clunkers program issued from January to September.  Comparisons will get more difficult as we move to the back half of the year.


Certainly on an annual compare the rise is less impressive and is much more in line with our longer term thesis that Germany’s heavy industrial and manufacturing exporting base will benefit from increased global demand this year, albeit as a slow churn higher.


The sequential move in orders of +4.3% versus a contraction of 1.6% in December is significant. Export orders rose 1.9% on the previous month with a 6% increase in demand coming from the Eurozone countries. Domestically, orders rose 7.1%.  


At times over the last two years we’ve had a long position in Germany via the etf EWG in our model portfolio. Currently our only position in Europe is short Spain (for a TRADE) to take advantage of a price action move to the upside in the etf EWP; however, our continued bearish outlook on the country due to such negative catalysts as massive unemployment, public and private debt leverage, and a failed housing market, remains.


The German economy is one that we continue to like because of its sober fiscal policy. Chancellor Merkel reaffirmed her conservative stance versus the debt issues associated with Greece today in a meeting with Greek PM George Papandreou.  Although we wouldn’t rule out intermediate-term assistance from the European community to fund Greece’s debt problems, the immediate term “clean-up-your-own-house” stance from Merkel sets a positive tone for the region.


The three times oversubscribed 5 Billion EUR Greek bond issuance yesterday—albeit with at a heavy premium rate of 6.25%--is an initial positive step, but we believe significant risks still remain, which we’ll continue to monitor real-time.  


Matthew Hedrick



German Factory Orders Surprise to Upside - GER


R3: Information Overload


March 5, 2010


When same-store sales day and earnings collide, there is always the risk of information overload. Within all the data points, forecasts, and ultimately opinions, there are a handful of items that caught our eye.





When same-store sales day and earnings collide, there is always the risk of information overload. Within all the data points, forecasts, and opinions, there are a handful of items that caught our eye: 

  • Target noted that traffic continues to increase to its stores, but that the overall result was driven by a balance of transaction growth and average transaction size. Consumables also remain a leading category, with sales increasing in the mid to high single digit range. 
  • JC Penney highlighted that all major categories showed positive same store sales for the month, with one exception. Home continues to lag and remains in negative territory. Interestingly, Kohl’s noted that home was one if its best categories. While this is not the first month we’ve seen such a divergence, there is clearly a market share shift underway. 
  • Urban Outfitters announced its latest concept, set for launch on Valentine’s Day 2011. The company will create a wedding lifestyle concept, selling bridesmaid and special occasion dresses, shoes, bags, accessories, and intimate apparel. The first prototype is slated to open by year-end. The concept rounds out management’s goal of having six concepts in its portfolio as keys to growth over the next 10 years. 
  • Ross Stores noted exceptional growth in its shoes and home categories during February, with both increasing by over 20% on a same store sales basis. Both categories have been performing well for a while now, but not to this extent. Dresses were no longer mentioned as a top performer. 
  • Nordstrom noted that traffic continues to be the driving force behind its accelerating comp trend. For the sixth month in a row traffic has increased while average ticket remains negative. 
  • Genesco noted that it is seeing early signs of a shift to “brown shoes” for its customers at the same time their athletic business is underperforming. We suspect this has something to do with the recent pick up in athletic elsewhere in the mall. With Journey’s narrow athletic assortment, they are clearly having a tougher time competing. 
  • Aeropostale noted solid initial selling of its Spring merchandise. However, a mix shift towards lower priced, lighter weight Spring apparel put pressure on average unit retails (down low single digits). Units per transaction increased by mid single digits and overall transactions increased by low single digits. 
  • Abercrombie noted that its strongest week of February occurred while all brands were executing their Winter clearance and sale events. This took place over week one.


Eric Levine





Amazon launches an invitation-only WebStore - Amazon.com Inc.’s Amazon Services division has launched the new Amazon WebStore that enables online sellers to build and operate an e-commerce business and integrates with other Amazon services including Selling on Amazon and Fulfillment by Amazon. Amazon is offering a limited number of invitations to the new program, which is in a beta version, each day. Sellers can request an invitation at http://webstore.amazon.com. The new product is Amazon’s revamp of its current WebStore by Amazon that enables businesses to create their own privately branded e-commerce sites using Amazon technology. With WebStore by Amazon, businesses can choose from a variety of web site layout options and customize their sites with their own photos and branding. Retailers using the existing WebStore by Amazon service pay a commission of 7% for each product purchased through their site and a $59.95 monthly fee, which includes the cost of credit card processing and fraud detection services. Amazon did not disclose the fees for the new Amazon WebStore, but says the pricing will vary with the size of a business. <internetretailer.com>


Coach to Expand Fragrance Reach - Coach is expanding its fragrance distribution. The accessories giant, which launched its first eponymous fragrance in March 2007 in its own doors only, is rolling out that scent to about 1,400 department and specialty store doors in North America, including selected Bloomingdale’s, Nordstrom, Macy’s, Dillard’s, Lord & Taylor, Von Maur, Bon-Ton, Belk and Sephora units in the U.S. The effort begins this month. The launch will be supported by an integrated marketing and communications campaign, including widespread national print and web efforts, noted Veronique Gabai-Pinsky, global brand president, Aramis & Designer Fragrances, BeautyBank and IdeaBank at the Estée Lauder Cos, Coach’s fragrance licensee. “We’ve handled the brand very carefully and steadily since its launch, allowing it to incubate at its own pace,” noted Gabai-Pinsky. “We’ve always been in this business for the long haul, and it’s time to expand its reach.” This fall, the brand will enter global markets, beginning with Asia, and will also enter travel retail doors. <wwd.com>


Cabela's Appoints Supply Chain Officer - Cabela's Inc. hired Doug Means as its executive vice president and chief supply chain officer. Previously, Means served as Executive Vice President of Production for Better Sportswear at Jones Apparel Group, which he joined in 1992. During his 18 years at Jones Apparel, Means held a variety of positions within supply chain operations focused on day-to-day management as well as process, speed and cost improvement. His responsibilities included managing the industrial engineering, distribution, logistics, social compliance, customs, production, sourcing and product development areas. Prior to joining Jones Apparel, Means was a consultant for Kurt Salmon Associates in Atlanta, Ga., where he assisted clients in improving operations, developing strategic distribution and logistics plans, and building logistics optimization models.  <sportsonesource.com>


Winter Weather Cut into February Apparel Sales - After January's increase of 0.6%, U.S. apparel sales fell 1.8% in February 2010 on a year-over-year basis as severe winter weather depressed sales in many areas of the country, according to MasterCard Advisors' SpendingPulse. While the decline was driven by women's apparel, which was down 1.6% against last year, both men's apparel and footwear were up 5.7% and 2.2% respectively, over February 2009. While severe snowstorms hurt apparel sales in the Mid-Atlantic, Northeast and North Central regions, most U.S. retail sectors showed year-over-year growth in February, following a largely positive January, according to Michael McNamara, VP, research and analysis for SpendingPulse. He said pricing continues to remain strong. "Retailers seem not to have needed extreme discounting to drive traffic to their stores," McNamara said. "This may have been due to a much tighter inventory situation than what we saw last year." Particularly strong results were posted in eCommerce, with 16.7% year-over-year growth. McNamara noted that while the channel may have benefited from the severe weather, it was the seventh straight month of double-digit growth. "This sales channel continues to outperform traditional brick-and-mortar stores as consumers shift more of their purchasing online." According to the SpendingPulse Price Index, which tracks average ticket size and can be impacted by discounting or change in product mix, the average price of an online transaction dropped 3.7% compared to last year. McNamara explained that this was due to consumers' increasing willingness to make even small purchases online. Continuing on a positive note, Luxury ex-jewelry sales were up 15.2% over February of 2009, following a gain in December of 5.5% and again in January of 8.1%. <sportsonesource.com>


Video messages in e-mails are set for a boost in 2010, study says - Consumers this year will see a jump in e-mail marketing messages that contain videos showing content such as customer testimonials and product demonstrations, e-marketing firm Implix says in a new report. At least 80% of the approximately 200 small- and medium-sized e-mail marketers surveyed by Implix between Jan. 27 and Feb. 5 said they plan to use video e-mails this year, up from about 16% that said they used videos in 2009. Implix operates the GetResponse platform for e-mail marketing campaigns. 46% of survey respondents said videos within e-mail marketing messages significantly increase conversion rates, while another 20% said videos moderately increase conversion rates. 5% doubted videos influence conversation rates, while 29% said they were unsure. Videos that offer training courses or product demonstrations were considered the most effective types of videos by 51% of respondents. Product promotions, customer testimonials and brand image messages were considered less effective. <internetretailer.com>


The Macau Metro Monitor, March 5th, 2010



RWS gaming revenue per day has increased to $7-$8 million over the last week, much higher than the initial $3 million per day during its opening days. According to Union Gaming Group, RWS is generating earnings margins of 40 to 60%.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%

Oy Vey

“Maturity is achieved when a person postpones immediate pleasures for long-term values.”

-Rabbi Joshua Loth Liebman


Since we actually have a Rabbi on staff at Hedgeye Risk Management (for compliance purposes and not for reasons of faith), one would expect that he would be the one to take the lead in quoting a Jewish religious leader to start off the Early Look.  Ironically, it is not Moshe Silver, but Daryl Jones, the hockey playing goy, who has decided to quote Rabbi Liebman this morning.


For those who didn’t know, Rabbi Liebman was the author of book entitled, “Peace of Mind”, which was on the New York Times best seller list for more than a year and in fact reached the top of the list for a period of time.  To say Rabbi Liebman was no schlepper, would be an understatement.  He graduated from the University of Cincinnati at 19.  By the time he was 27, he was an ordained Rabbi and leading his own synogogue.


Despite passing away at the early age of 41, Rabbi Liebman left us with some memorable quotes from his writings.  As I was reflecting on the disparities of fiscal policy among nations, this quote stuck with me.  One on hand we have central bankers in some nations that are acting prudently and “postponing immediately pleasures for long-term values.”  While on the other hand there are certain central bankers and government leaders that continue to endorse erroneous fiscal policy with such chutzpah that we can only be concerned.


Chinese Premier Wen Jiabao of China, who is no schmendrik in our books, of course has been on the proactive and rational end of endorsing prudent fiscal and monetary policy.  Yesterday, while speaking to his colleagues in the Chinese government, he indicated that the Chinese economic growth path was “unbalanced, uncoordinated, and unsustainable.”  This morning the news out of China is that Jiabo is warning of the “latent risk” in Chinese banks and is pledging a crackdown on property speculation.


So, not only does Premier Jiabao see bubbles, he is trying to proactively prevent them.  Whether he will be successful before we have some sharper correction in China is yet to be seen, but the reactions we are getting from the private sector in China (if we can call it that) are certainly positive. Specifically, two major Chinese banks, ICBC and Bank of China, announced this morning they will slow lending after a record year in 2009.  While there are many investors that still aren’t kosher with China, we like this proactive fiscal leadership.


The risk of being a klutz as it relates to managing your budget and fiscal policy is that on the day of reckoning, when you are on the verge of default, is that there may not be anyone to support you.  Greece has its well publicized issues, which were emphasized by the egregious rates that it had to pay for debt yesterday in its $5BN Euro offering of 10-year notes (300 basis points above Berlin), and today we see where its neighbors stand on a bailout for the nation.  According to the German economic minister, Germany will not be offering Greece “even one cent.”


In contrast to China, yesterday we had two members of the U.S. Federal Reserve system, Chicago Fed President Charles Evans and St. Louis Fed President James Bullard give spiels on the economy.  Evans indicated that he needs to see “signs of sustainable growth” before supporting tightening and Bullard stated he thinks policy makers should remain “very accommodative”.  The leaders of the Fed continue to prove one thing, they are great shmoozers, but in terms of showing proactive leadership and moving past Depressionista level interest rates, they continue to fall short.


While we may be Fed Up With The Fed, there are nations and leaders that continue to show fiscal leadership.  With the mazel tovs barely behind them for winning a gold men in Men’s Ice Hockey, Prime Minister Stephen Harper of Canada proposed a budget yesterday with aggressive federal spending cuts.  The budget would position Canada to be the first member of the G-7 to erase its deficit by 2014. 


Not everyone is receiving this budget well.  As a columnist in Toronto’s Globe and Mail wrote today about the Harper strategy:


“We're going to ignore the environment, because you don't care. We're going to balance the budget, because you do care. We're willing to risk a fight with public servants, because you want us to. We're not going to spend money on anything new, because you don't want us to.”


Prime Minister Harper’s leadership here is admirable.  We continue to be bullish on Canada.


Focusing on a nation’s fiscal and monetary policy is critical before making an investment in any nation.  We need this policy to be “mature” and to “postpone immediately pleasures for long-term values.” After all, as history tells us, countries cannot issue debt in perpetuity without consequences.



Daryl G. Jones





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.


Its not a surprise that Macau comps get a lot tougher in 2H 2010. What may be a surprise is that two-year comps have not really accelerated in recent months despite the big headlines. 



Macau has been gangbusters since August of last year and the trend line has been upward sloping.  Of course, the first half of 2009 was a disaster so the comps have been quite easy and will continue to be through June.




Given the volatility in the one year comps, we thought it would be instructive to look at the revenue change on a two year basis.  Here the recent monthly revenues for both VIP and Mass still look impressive on an absolute basis – Mass up 30% and VIP up almost 50% in February.  However, the February 2-yr comp for Mass is actually at the low end of the range while VIP is in the middle.  The 2-month moving average line is not upward sloping either.  So has Macau growth accelerated in recent months or just held steady?  It depends on your perspective.






Conclusion:  comps matter.  The question is will the sequential slowdown in growth in 2H 2010 impact investor sentiment?

US STRATEGY – Inching Up

The S&P 500 is looking to end the week with another move to the upside.  Yesterday, the S&P 500 finished quietly higher by 0.4% on very light volume.  The S&P is now up 1.8% over the past five trading days. 


On the global MACRO front the risk trade continues to abate on the back of the upbeat developments out of the Eurozone, as Greece's sale of 10-year notes was supposedly more than three-times oversubscribed (according to StreetAccount).  The VIX continues to confirm the RISK AVERSION trade.  The VIX declined 0.6% yesterday and continues to be broken on all three durations – TRADE, TREND and TAIL.


On a number of different MACRO factors, price trends point to a continued recovery, though even with the S&P less that 3% from its recent high, there still seemed to be a lack of conviction.  Other positive MACRO moves yesterday included better-than-expected February comps, dampened regulatory concerns in the financial sector and a downturn in initial claims.  The two best performing sectors yesterday were the Financials (XLF) and Consumer Discretionary (XLY). 


The retail momentum continues with the S&P Retail Index +1.3% yesterday.  The index was underpinned by better-than-expected February same-store sales data, despite the fact that consensus was already fairly upbeat going into the day. 


Parts of the REFLATION trade outperformed yesterday; the Materials (XLB) was the third best performing sector yesterday despite renewed tightening fears that led to a selloff in China and a very strong dollar.   


The market seemed to ignore another round of weaker-than-expected housing data, as pending home sales fell 7.6% month-to-month in January vs. expectations for a 1% increase.   The January decline, which followed a 0.8% increase in December and 13.7% plunge in November, was broad-based, as all four regions posted lower sales.  Seasonal issues and weather is a partial explanation for the weakness in the recent trends.  Expectations are now for sales to surge in existing-home sales in April, May and June.


Yesterday, the best performing sector was Financials (XLF).  The sector benefited from the waning effort to overhaul the financial system.  This dynamic seemed to be particularly supportive for investment banks and money-center names.  


As we wake up today, equity futures are trading above fair value in a continuation of Thursday's rally on the back of the strong retail sales numbers. Today's focus will be on the February employment data.  On the MACRO calendar today we have:


February Nonfarm Payrolls

January Consumer Credit


In early trading, copper is trading higher and headed for a third weekly gain in four weeks.  Gold is little changed in London and looking to advance advance as demand strengthens on concern about European sovereign debt.  Yesterday, crude fell for the first time in two days as the dollar strengthened.  Oil is trading slightly higher today. 


Howard Penney

Managing Director

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