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"With our redevelopment projects now complete, Great Canadian finds itself in a robust financial position. We attained this position by being conservative, and we will continue to adhere to this philosophy as we analyze options for our future. It is vital that we remain cautious about our markets' economic outlook. But we have made many improvements over the past twelve months, and I am confident that these will facilitate the creation of greater stakeholder value during the year ahead."

- Ross J. McLeod, Great Canadian's Chairman and Chief Executive Officer



  • "This increase was primarily due to the comparable period, which was negatively impacted by heavy snowfall, economic uncertainty, and disruption from construction at the property. The increase was also due to both the August 17, 2009 opening of the Canada Line mass transit station at River Rock and the November 19, 2009 completion of various upgrades at the facility. Despite the weakened economy, these redevelopments combined to generate significant improvements in visitation, table drop, and slot coin-in at the facility during the fourth quarter"
  • "Revenues at the Company’s Vancouver Island Casinos increased by 1% in the fourth quarter of 2009,
    when compared to the fourth quarter of 2008. This was primarily due to the installation of additional
    gaming capacity at View Royal during the third quarter of 2009, the benefit of which was partially offset by
    the impact of the weakened economy."


  • Concluded the year with a leverage ratio of 3.14x
  • River Rock outlook:
    • Canada Line has grown RR's visitation by roughly 20% and slot coin in by 10% since the opening of the Canada line.  February 2010 results: table drop, slot coin in and visitation saw double digit growth, which were all offset by low hold of 14.9%.  Combined with the closure of Hastings, revenues in BC decreased 7.6%
  • 2010 Outlook:
    • Many of GC's markets remain challenged. 
    • We cannot cost cut our way to prosperity
    • Every one of their BC properties has received a slot refresh
    • Georgian Downs will get another 150 machines in 2Q2010
  • While View Royal's expansion results have been disappointing they believe things would have been worse without it
  • Moved River Rock's poker room across the way and replaced it with a VIP room. They also increased slot capacity, at a cost of $2.75MM
  • Anticipate that development capex will be $15MM with an additional $10MM committed to maintenance in 2010
  • Developing and improving player tracking and reward programs
    • This is something new. In the past the BCLC didn't allow player tracking
  • GC will amplify its marketing programs throughout 2010, and this will result in a small increase in operating expenses, but they feel that they will be targeted and effective
  • Now that GC's major developments are complete, they will accumulate cash. They will use the cash to delever the balance sheet if no compelling investment opportunities arise
    • I wish they would have left the whole M&A comment out ... I doubt there is a lot of confidence in their ability to invest capital effectively


  • Slot system upgrade by the provinces? What are they doing?
    • BCLC is considering a new slot system
      • I believe there is an RFP out for this business
    • They are lobbying to be more involved with player tracking
    • In Nova Scotia they are in the process of going through a slot refresh but not considering a new system
  • Vancouver Island margins were very high. Are they sustainable?
    • They were actually disappointed with the margins given the expansion there.
    • Play at those properties were impacted by market hits to retiree savings - and while they have recovered somewhat, the play levels are still depressed
  • New competition in New Brunswick will open in May/June. They have some Halifax customers that will be closer to Moncton than their property.
  • No competitive changes from Gateway Casinos
  • Marketing budgets in 2010 impact on EBITDA?
    • Duh... they obviously think it will have a positive impact otherwise they wouldn't be doing it
    • If the marketing programs don't produce results they will dial them back
  • Any impact on March spending / patterns post Olympics
  • Normal tax rate going forward is around 30%
  • "We're in the consumer discretionary business and the consumer is still watching their spending"
  • Ok these hold questions are just completely idiotic... these analysts are clearly "generalists"
  • Deferred projects are still deferred - no ultimate decisions made at this point regarding those projects
  • Marketing questions are equally idiotic... please stop
  • Boulevard's weak results are impacted by increased competition from the New Villa, tough economy and the demographics in those markets.  There has also been significant road construction in that area which have impacted visitation
  • Once the R/C is paid down they will not pay down the notes bc there is a pre-payment penalty.  They'll accumulate cash
  • Canada Line is really driving the slot business, not the table business really.  Got a refresh of 300 machines at River Rock. Now they are at 1,000 from 854 machines.



The Macau Metro Monitor, March 8th, 2010



As LVS's US $1.75BN five-year loan deal draws to a disappointing close, eyes are now focused on Galaxy's HK$7BN (US $903MM) six-year financing package, which is expected to hit the market by the end of March 2010. LVS's financing struggles to find lenders as only four banks have joined in syndication so far, committing US$100MM in aggregate. Total commitments in general for Sands are expected to come to less than US$300MM or a selldown of less than 17% of the $1.75BN loan commitment, which is comprised of a $750MM Term Loan A, $750MM delay draw Term Loan B, and a $250MM R/C - tranche C. Banco Nacional Ultramarino, BoC (Macau), BNP Paribas, Barclays Capital, Citigroup, DBS, Goldman Sachs, ICBC (Macau), OCBC and UBS were the loan underwriters.


Galaxy's loan syndication has already run into several roadblocks, including: 1) Bank of China (Macau) rumored to have dropped out after it failed to obtain credit approval, supposedly as a result of China's tightening of  bank lending  2) BoA/ ML,  which was initially mandated to arrange the HK$6-$9BN bond and loan financing package, is now rumored to be handling the capital markets portion only. 3) Coming on the heels of a cold Sands deal could mean that lender exposure to Macau will be saturated, especially if syndication efforts prove less successful than hoped.


However, since Galaxy is a debut borrower and results at its flagship property, StarWorld, have been strong, they may have an easier time attracting capital then Sands - which banks already have a high exposure to. Galaxy Macau Resort, needs an additional HK$9BN funding to complete the HK$14BN project. Galaxy’s facility will have a term of less than five years and all-in spread of 500bps.


Sheldon Adelson said that LVS is gearing up to launch the sale of the Four Seasons apartment hotel tower in a cooperative form of ownership, at the Deutsche Bank 2010 Hospitality and Gaming Conference last week. This new agreement with the Macau Government seems to placate Macau lawmakers such as Au Kam San, who argued that the sale of serviced apartments on the lucrative Cotai Strip represents a flagrant example of profiteering.


“We want to sell the apartments just to players who lock in their loyalty to where they own their apartment,’’ Adelson said, “If we proceed in selling co-ops, I believe that the future and the perception of our company will change for the better, dramatically.”  Michael Leven, LVS's COO, said at the Reuters Travel and Leisure Summit that the co-op sales would bring in more than $1 billion.


UP Destination Macau

According to DM, the strong results seen in the last week of February will continue into March and that 2010 may even see a month where results break MOP 20BN (likely in November).  DM explains that whenever Macau experiences a surge in visitation, such as a Golden Week, there is usually a secondary pop about a week to two afterward when the friends of those who came in previously hear about all the new attractions and games that they missed out on, therefore decide to go and see for themselves. DM's consumer surveys show that more than two-thirds of Macau visitors come on the “advice and recommendation of a friend/relative”.  Hence, a strong CNY is followed by several strong weeks of visitation and gaming revenues.


 DM believes that even though credit may be tightening on the mainland, it's impact on Macau is being over shadowed by huge new wealth growth. DM sees overall red-hot gaming revenue growth, with month-on-month dips in April, June and September.


WYNN AND SANDS, RULE OK? Destination Macau

The DM is optimistic on the management team of Sands China under Steve Jacobs rule, in driving performance results, as every square inch of their properties is being questioned and examined to improve efficiency. DM believes that Sands EBITDA can exceed the $1BN mark in 2010.There are some delays on construction resuming on Lot 5&6, but those are most likely temporary.  


DM continues to expect outperformance from Wynn Macau especially as Encore opens and brings much needed room capacity to the property. 


Fernando Chui Sai-on delivers his first policy address a week from Monday. He will address the biggest headache facing the people running some of Macau's best casinos over how to raise their service standards by developing their staff better. Chui is ready to make labor importation a priority again, so don't expect an explosion of Blue Card approvals anytime soon. In addition, Chui will comment on how to make money for everyone important who doesn't necessarily own a casino license in Macau. He wants to reinstate the migrant investment scheme which is great news for those with property to sell, like Shun Tak and Sands China.



According to The Macau Post Daily, which quoted Ho Iat Seng, a Macau member of the Standing Committee of the National People's Congress (NPC), China's Vice President Xi Jinping said that Macau needed to adjust, control and monitor the gaming industry in order to ensure its orderly development. Xi stressed that while Macau's outlook was good, there was a need to grasp hold of key opportunities, particularly the opening-up of Hengqin Island, in order to create a climate of sustainable development in Macau.


As we said in our sales preview, “MCD FACING TOPLINE PRESSURE” (02/26/10), MCD had easy comparisons across the board for all segments.  This was especially true in APMEA because of the Chinese New Year calendar shift.  As expected, the headline numbers appear better than the underlying trends actually are.  As we rated the potential range of sales trends for MCD in February, all of the trends were in line with can be viewed as BAD; all regions showed a slowing in 2-year trends.  On a sequential basis, 2-year average trends slowed in the USA by 65 bps, Europe by 310 bps and AMPEA by 165 bps.  Given current trends, the next two months pose very difficult comparisons for MCD.









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R3: JNY: What’s The Incremental Buyer Looking For?


March 8, 2010


JNY continues to rip. The fundamental negative call is unchanged, but rather the entry price is better. The biggest pushback is on margin opportunity. Here’s our rebuttal.





JNY is perplexing me. I originally highlighted this one back on Feb 10th as a name that was looking fundamentally broken – again. The market could care less, apparently, as the stock has continued to be a champ. Yeah, retail has been ripping, with the S&P up 6.5% and retail (measured by the MVR) is up 11.2%. But JNY is up nearly 18%.


As I step back and revisit the thesis, my confidence is unchanged. The price is simply better.


One element that has changed is that now I have a few weeks’ worth of feedback on the call, and I fundamentally disagree with one of the most common bits of feedback. That is “At 5% margins, JNY is at only a third of historical peak margins. There’s got to be levers that this team can pull in order to take margins higher. Whether they should be pulling these levers is irrelevant.


I think that all the moving parts over time have gotten lost here. First off, those former peak margins were simply false. The company was underspending across the board to print unsustainably high margins. It had a pre-tax margin on its Ralph Lauren licensed business (20% of total) of 25%. Do the math on that. It makes a mid-single digit margin all the more realistic on the base business. Well, that’s not here anymore. RL took it back because JNY was doing what it does best – underinvesting in brands. What else has changed? Barney’s is sold. The consumer is no longer strong, and there’s no more juice in the one-time benefit of import quotas being removed to pad JNY’s margin structure. Add that together, and my math suggests that the 7.4% consensus margin estimate out to 2012 is setting a new peak.


As evidenced in the chart below, there’s a meaningful divergence in our margin expectations and the consensus. That is effective immediately.


R3: JNY: What’s The Incremental Buyer Looking For? - 1


What does the incremental buyer need to bank on? I think the right multiple to use as a starting point is about 12x EPS and 5x EBITDA. That’s the mid-point of where it’s been in the past (when it was a seemingly better company). I’m not in the business of pegging a multiple and arguing that a stock will get there. The market is smarter than that (and me). But using these multiples it is telling me that at current prices we need to back into about $1.55 in EPS this year. Mind you, the Street is at $1.30 and we’re at $1.13. I think at best JNY gets to $1.55 in 2012. That’s a loooong time to wait.


What Concerns Me?


The upcoming quarter is the easiest year/year comparison of the year. There is still the residual impact of selling in to a sparsely inventoried channel (both wholesale and retail alike), and the pressure will not mount for markdown dollars and increased margin volatility until 2Q. On the flip side, the balance sheet setup is horrible – and that is effective immediately. In addition, sentiment remains quite positive on this name – as measured by its mid-single-digit short interest. So the Street is still playing the near-term momentum on this. But the risk of being a quarter early still eats away at me.


Reminder on Some Core Modeling Assumptions: 


1. Wholesale Better Apparel (29% of Revenue and 55% of cash flow): Printed an 11.2% margin in ‘09 – up 128bps from a year-ago. This margin absolutely HAS TO hold, which is a stretch. With so-called ‘bad business’ already having been pruned (i.e. lost), the natural mix shift to a better book is not going to recur. JNY will get about a 3% top line boost due to its Rodriguez acquisition and from jump ball business created by LIZ hopping in the sack with JCP. But on the same token, with LIZ no longer at Macy’s whim, JNY will see added pressure for markdown dollars at quarters’ end by the 900lb gorilla – even if it is not JNY product that is not selling through. This also holds true for Jeanswear and Footwear.


2. Wholesale Jeanswear (24% of revenue and 35% of cash flow): Let’s face an ugly reality. This business just printed a +3.5% top line in 2009, but a 385bp improvement in segment margins, and it just highlighted a major roll over this quarter in top line due to anniversarying a big push last year with l.e.i., and increased competitive pressure. This was also the source of JNY’s asset write down. Margins in ’10 are not looking good here.


3. Wholesale Footwear (26% of Revenue and 30% of cash flow): This business is the poster child for a wholesale business that benefitted from the boot cycle. Could it last another quarter? Maybe. Another year (of sequential improvement in trajectory of boot sales)? Not likely – by a long shot. The company is guiding for 4-9% top line growth for ’10. This looks like a stretch without meaningful margin erosion.


4. Retail: (21% of revenue and -20% hit to cash flow): Here’s where I’m most concerned. JNY is in store closing mode, and 1Q alone should see a double digit revenue hit due to 50 fewer stores, and that should accelerate to 165 stores by end the of the year (it closed 96 in 2009). Also, retail has been a beneficiary of the boot cycle – something that’s not likely to recur in 2010. Management is on record as saying that it will break-even at retail this year. That might seem impressive in looking at the $41mm loss JNY just printed at retail. But read the fine print – that is ‘before corporate allocation.’  We estimate about $40mm in corporate expenses, or about $12mm at retail. So ‘breaking even’ actually equates to losing a double-digit number in what is reported to the Street. You can’t cut a business to profitability long-term. Ultimately you need to sell stuff that the consumer wants.


5. Balance Sheet: Lastly, let’s consider this thing called the balance sheet. On the plus side, JNY printed a commendable 18 point spread between sales growth and inventory growth. But how much longer is that sustainable for? Working capital should be helped by store closures, but keep in mind that in 2009 working capital was accretive to cash flow from operations to the tune of 29%. That’s the SAME year when capex as a percent of sales came down to 0.9%. Yes, boys and girls, that’s 0.9%. Can someone find me any company that touches this industry that can sustain a capex rate below 1%. Thanks in advance. In fact, JNY already guided that capex is going up to 1.5%, or about 55-60%.


6. Buy, Buy Buy. Another note on cash. JNY did not buy back stock this quarter, and in fact it issued a small amount. The company said flat-out that it is in full-on deal mode. No stock repo, no debt paydown. They’re gonna buy something. Let’s look back at JNY’s track record of acquisitions. Actually, let’s not. It’s too depressing. Just take a quick glimpse at long-term return on capital.


The bottom line here is that JNY is easing back into the ‘old Jones’ mindset. Cut when you should invest, and acquire when you can, not when you should.  Let’s not forget that this is a company that historically traded as low as 3-4x EBITDA and 9-10x EPS, and had up to 35% short interest. Today it is at 6x EBITDA, 14.5x earnings, and has a paltry 6% short interest. Some might argue that 6x EBITDA is not expensive. And overall, it’s probably not – IF they believe in the stability of cash flow. I’ll go to the mat with them on that one!




  • The latest trend at the box office is clearly the proliferation of 3D movies. In 2009, 3D movies took in $2 billion in revenues, nearly seven times the amount recorded in 2008. Keep an eye on the development of “in-home” 3D technology, which is sure to follow as the studios work to boost revenues outside of the traditional box office. Now if only we didn’t have to wear those silly glasses to experience the excitement…. 
  • A MasterCard Spending Pulse report for the month of February reported that the spending on luxury goods (ex jewelry) increased by 15% for the month. This marks a substantial increase from January, which increased by 8.1%. However, the increase also comes during a month when almost all retailers showed a measurable increase in momentum and across all price points. 
  • Over half (55%) of mobile social networkers were found to be women - not teens, who are more likely to use their devices to text. In fact, teenagers and college students combined account for less mobile social network traffic than their parents. And it's not women from the younger end of the age scale using their mobile deivecs to socialize. The largest segment (36%) consists of 35 to 54 year olds followed by those aged 25 to 34 (34%). 




Payless to Launch Beauty Line - Payless ShoeSource will soon find out if customers have the same passion for lipstick and body sprays as they do for shoes and accessories. The footwear and accessories mammoth, with 4,500 stores, is gearing up to launch a beauty component to the business this fall through an alliance with Maesa Group. Terms of the deal were not disclosed, but the firm called it a “multiyear arrangement.” Payless Stores, with 1,500 units, will introduce, starting Sept. 1, bath and body products under the names Zoe & Zac and Unforgettable Moments, linking back to proprietary shoe and accessory brands of the same names. Beauty products will include a collection of up to 60 items such as lotions, creams, fragrances and color for eyes, lips and nails. Prices will range from $2.99 to $19.99. Via said the beauty lines are geared to please women of all demographics. Payless traditionally targets mothers and daughters. It has not been decided if the firm’s designer collaborators in shoes and accessories such as Alice & Olivia, Christian Siriano and Lela Rose would take part in the new category. While Via declined to offer sales projections, she expects the new initiative to be “a significant business” for the firm and that beauty will eventually be rolled out to the remaining 3,000 stores. <wwd.com>


Wal-Mart Brings Back Goods as Shoppers Turn to Lowe’s, Walgreen - Wal-Mart Stores Inc., the world’s biggest retailer, is bringing back some products it had removed from shelves last year as shoppers turn to competitors for a wider selection of merchandise. The company met with suppliers about reinstating items to keep customers from going to other stores, said Leon Nicholas, a director at consulting firm Kantar Retail who has spoken with manufacturers about the move. Wal-Mart, based in Bentonville, Arkansas, said it frequently assesses product assortment. Wal-Mart is returning some health and beauty supplies, cereal, pet treats, soda and laundry detergent, Nicholas said. The retailer said last month its U.S. stores recorded a drop in sales and had a “slight decrease” in customer traffic in the quarter that ended in January. “Wal-Mart cut too deep and now they’re going back to manufacturers,” Michael Kantor, chief executive officer of the Promotion Optimization Institute, said in a telephone interview. The organization trains retailers and producers, including Wal- Mart suppliers, to work together on marketing and merchandising. Kantor is based in New York. Last year, Wal-Mart reduced the number of merchandise varieties, known as stock keeping units, or SKUs, sold in the U.S. in categories such as laundry detergent and bedding. U.S. stores cut inventories by 7.6 percent while increasing sales by 1.1 percent. Gross margin, or the proportion of sales left after accounting for the cost of goods sold, advanced 73 basis points. <bloomberg.com>


Kohl’s heads west to open a new e-commerce distribution center - Kohl’s Corp. wants to get closer to its online shoppers, especially on the West Coast. To expedite picking, packing and shipping to online shoppers in California and other Western states, Kohl’s is opening a new distribution center near San Bernardino, CA. Initially the new center, which will occupy almost one million square feet, will fulfill Kohls.com orders in all 50 states, but in 2011 will be dedicated strictly for packing and shipping West Coast orders. Kohl’s now has 11 distribution centers that ship merchandise to its stores and a dedicated e-commerce fulfillment hub in Monroe, OH. The new facility, which could employ as many as 500 workers, is needed to support a growing e-commerce business, the retailer says. Annual web sales at Kohl’s increased 38.1% to $491.5 million from $356.0 million in 2008. “We're making a major new investment in capital and infrastructure in our e-commerce business to fuel future growth,” CEO Kevin Mansell told Wall Street analysts on the chain retailer’s year-end earnings call. “Based on our research and our own results, it appears that our opportunity in this business is substantially larger than we originally envisioned.” <internetretailer.com>


Nike/Cole Haan to Bann Exotic Skins from Shoes - Nike and its affiliate Cole Haan announced that they will stop selling products that are made from exotic skins like lizard, snake and alligator. People for the Ethical Treatment of Animals (PETA) said Cole Haan is the first maker of high-end accessories and shoes to ban exotic skins. Cole Haan defines exotic as including alligator, crocodile, lizard, snake and ostrich. A Nike spokesman told the Associated Press that products using those materials will be eliminated across the entire Nike line after the summer retail season. According to Nike's revised company policy, "Animal Skins must not be any species considered to be exotic. Examples include, but are not limited to alligator, crocodile, lizard, snake, ostrich, fish, marine mammals, etc." "Every snakeskin bag, shoe, or jacket sold in a trendy boutique comes with a high price--and it's paid by animals who are torn away from their jungle homes and cruelly killed," said PETA Executive Vice President Tracy Reiman, in a statement. "We're asking retailers worldwide to follow Nike's lead and step away from cruelty to animals by giving exotic leather the boot." <sportsonesource.com>


Billabong to License Skate Brand Plan B - Billabong International Limited today announced it has entered an exclusive 10-year agreement to license the California-based skateboard brand Plan B. The partnership, which covers all territories globally, will see Plan B continue under its current management structure and leverage the backend distribution and general business support of the Billabong group. Billabong North America president Paul Naude said the licensing arrangement would allow Plan B to maintain its focus on the creation of premium skateboarding products and the promotion of skateboarding. <sportsonesource.com>


CircuitCity.com launches a new payment option - CircuitCity.com has launched a new payment option, the CircuitCity Preferred Account, that seeks to build customer loyalty by allowing customers to finance their purchases and offering account-specific offers and promotions. CircuitCity.com is promoting the option on its web site and e-mails by offering preferred account holders $20 off a purchase of $100 or more when they use the account. A shopper can apply for the account at checkout. After answering two security questions, the shopper receives a credit check. Account holders pay no interest for up to 12 months on orders of $1,000 or more and up to six months for orders of $250 or more. “We think there is a loyalty factor here,” says Bruce Leeds, vice chairman of CircuitCity.com parent company Systemax Inc. “The people who apply are likely to come back more often and use the card. That’s a big positive.” <internetretailer.com>


Cornell Activists Protest Nike over Plant Closings - Cornell University's chapter of Students Against Sweatshops (CSAS) launched a new campaign dubbed, 'Just Pay It,' to protest events surrounding the closing of two factories in Honduras that had been operated by Nike subcontractors. As reported, activists at the University of Wisconsin-Madison as well as Purdue University have also protested alleged illegal wage practices following the closure of the Hugger de Honduras and Vision Tex factories in January 2009. Late last month, Cornell's chapter of Students Against Sweatshops met with University administrators and then issued a statement claiming Nike stopped sourcing from the Honduran factories, forcing a liquidation, according to a report in the Cornell Daily Sun. The group then claimed Nike refused to pay their workers approximately $2.1 of $2.5 million in severance pay legally mandated by the Honduran Government. The group said the nonpayment represents a breach of university clothing codes of conduct as well as the Designated Suppliers Program regulations that Cornell endorses. "Nike is trying to skirt its obligations by claiming there are legal loopholes that excuse their behavior," Casey Sweeney, President of Cornell Organization for Labor Action, said in a statement. "But both legally and morally, they are required to pay their workers." The Nike protests come after workers rights groups celebrated a landmark victory when Russell Athletic last November decided to rehire the 1,200 Honduran workers who had lost their jobs in a factory closing after student protests led to nearly 100 universities to cancel their Russell contracts. <sportsonesource.com>


Court backs EU anti-dumping duties on Chinese shoes - A European court has rejected an appeal by a number of Hong Kong and China-based shoemakers against import duties levied by the European Commission on shoes originating form China and Vietnam. "The adoption of anti-dumping duties is not a penalty for earlier behaviour but a protective and preventive measure against unfair competition resulting from dumping practices," the EU's second-highest court ruled. The European Commission imposed the duties in 2006, following a complaint by European manufacturers who argued that they were unable to compete with shoes dumped in the European market by low-cost producers in China and Vietnam. European Union ministers voted in December to extend the import duties for another 15 months, while Beijing launched a dispute at the World Trade Organization last month over the EU tariffs, claiming they were illegal.  <sportsonesource.com>


U.S. consumer credit rises for first time in year -  In an encouraging sign for the economy, U.S. consumers increased their debt in January for the first time in a year, just the latest hint that household demand may be on an upswing. Although the economy has picked up steam lately, many economists don't believe it will be on a sustainable path unless consumers restart their spending. Total seasonally adjusted consumer credit, a measure of total debt taken on by individuals, increased in January $4.96 billion, or at a 2.4% annual rate, to $2.46 trillion, the Federal Reserve reported Friday. Economists surveyed by MarketWatch expected consumer credit to decline by $6 billion in January. That marks the first increase in consumer debt since January 2009 and the biggest since July 2008. Another positive sign came earlier this week when data showed that U.S. chain store sales posted a very strong 3.7% comparable-store gain in February, the strongest reading since November 2007. After the financial crisis deepened in the fall of 2008, the economy fell into recession and consumers stopped spending. As a result, debt levels have declined. On a year-on-year basis, consumer credit is down 4.2%. The increase in January was led by non-revolving debt, such as auto loans, personal loans and student loans, which rose $6.62 billion or 5%. Credit-card debt fell $1.67 billion, or 2.4%, to $864.4 billion. That's a record 16th straight monthly drop in credit-card debt. <marketwatch.com>


Income and Spending Trends - Over the past many months, the de-leveraging process has provided us details that shows consumer credit coming down like an avalanche. If consumers are continuing to spend via credit, are we starting to see a trend that will return us to an economy that lives and breathes off of credit lines again? Perhaps it is a good sign that consumers are more confident about the future, but that would not match with the latest consumer confidence numbers. Core PCE is also showing a good deal of strength. That showed up in the recent retail same store reports from companies this week, which beat most estimates. Good news and bad news… 

  • Personal spending in January rose 0.5% after increasing 0.3% in December. The increase matched January’s retail sales numbers and exceeded the consensus estimate by 0.1 percentage points.
  • Personal income rose 0.1%, well below the 0.4% increase the consensus expected. Real disposable income fell 0.6%.
  • Inflation remained subdued as core prices were unchanged. However, higher energy costs pushed total consumer prices up 0.2%.

Key Factors

  • The spending data came in largely as expected. Goods expenditures rose 1.2% as nondurable consumption jumped 1.8%. Services consumption increased a modest 0.2%.
  • Personal taxes rose by $59.0 bln as federal net nonwithheld taxes rose by $52.5 bln. The jump in taxes should not carry over into February and growth in disposable income should look strong in response. <seekingalpha.com>

Retail Hires Up in Feb. - The U.S. Labor Department said apparel retailers increased staffing levels in February for the second month in a row, hiring 7,200 workers. Department stores hired 6,200 to employ 1.48 million, while specialty stores expanded payrolls by 1,000 to 1.37 million. In January, apparel stores added 23,600 jobs. The retail uptick was part of a Labor Department employment report issued Friday that was slightly better than expected. Month-to-month jobs data for retailers are difficult to interpret because of seasonal hiring trends, but the long-term trend for the sector “seems to be one of slow additions of jobs since roughly November,” Hoyt said. He cautioned some of the specific retail employment figures for the first few months of 2010 could be distorted because stores hired significantly smaller numbers of seasonal workers for the holidays and consequently had fewer layoffs when the season ended. In the broader economy, employers cut 36,000 jobs, fewer than analysts expected, and the unemployment rate was unchanged at 9.7 percent. Analysts expected the severe winter weather in February to negatively impact employment figures. <wwd.com

Captain America?

“We saved the economy, but we kind of lost the public in doing it.”

-Tim Geithner


The most obvious reality of the entire financial crisis is that those who created it will not be held accountable for doing so. I was talking to my Dad about it at dinner last night (he’s a retired firefighter), and he likened it to an arson pleading to be recognized as the heroic firefighter. My Dad is right – this is just plain sad to watch.


Churchill once said, “a politician needs the ability to foretell what is going to happen tomorrow, next week, next month, and next year. And to have the ability afterwards to explain why it didn't happen.” Thank you Winston – you certainly didn’t lack the self-awareness that those living in the Bubble of US Politics do today.


Timmy, sorry to break it to you buddy – you didn’t save us. You “kind of lost the public” circa 1, when you became a lifer at the Treasury and Federal Reserve. I agree with the article in The Atlantic, you definitely became a “superstar of the bureaucracy” in the last 22 years. You tried your best to save the legacy of Groupthink Inc., and now it’s just time you realize that it’s over. As they say on American Idol, “America has voted.”


Last week, global stock markets around the world were saved from those who have been Selling Fear for the better part of the last month. The SP500 was up a big +3.1% for the week, taking its rise from the sovereign debt ashes of February 8th to +7.7%. History can be really hard to remember for those who sold the March 9th low of 2009, but the SP500 is up +68.3% since this historical day of last year.


For those of us who have come to grasp the global risk management concept of interconnectedness, it’s probably not surprising that February 8th was also the day that the Greek stock market bottomed. Since February 8th, the Athex Index in Greece is up +16.1%!


Did Timmy and the boys in Washington save you from getting squeezed on the short side of that move too?  Or did Groupthink Inc. in Washington have a proactive risk management process that saw sovereign debt risks to begin with?


Maybe Nicholas Sarkozy of France can save us from the evil doer “speculators” who happened to notice these wanna be Vogue star politicians piling debt upon debt upon debt as being a bad thing. Maybe someone in America should remind Timmy that the US deficit to GDP ratio of 11.4% is within 100 basis points of Greece’s, and that he should be working on that math instead of doing PR shopping trips to prove to himself that he is Captain America.


After moving to neutral (from bearish) on US Equities on the week of February the 22, I finally re-shorted the SP500 on Friday’s close. This doesn’t mean I am calling for a stock market crash. This simply means that the risk management system that we refresh for every 90 minutes of marked-to-market trading flashed an important sell signal.


I know, I know. Those who operate with more of a reactive than proactive risk management process are going to tell you that you can’t time markets but, at the same time, they can save you from all your fears. It’s kind of weird, but take their word for part of that – they definitely don’t do timing.


The SP500 is now in what we call a bullish intermediate term TREND position. Importantly, that TREND line of support is -2.8% from Friday’s closing price. That’s a downside risk level to manage towards. I also have a more immediate term line (3 weeks or less) of what we call TRADE line support at 1113, so keep an eye on that.


Other global macro stock market risk factors (bearish market indicators) to keep your Hedgeyes on would be:

  1. Chinese stocks remaining below intermediate term TREND line resistance of 3,153 on the Shanghai Composite
  2. Spanish stocks remaining below intermediate term TREND line resistance of 11,394 on the IBEX 35 Index
  3. Greek stocks remaining below intermediate term TREND line of resistance of 2,178 on the Athens General Share Index

Across asset classes, there are also some interesting developments this morning, particularly in the US Treasury market. Apparently Mr. Macro Market doesn’t see “the alternative” that these politicians continue to fear-monger Americans with in trying to justify a ZERO percent rate of return on your hard earned savings accounts. Put another way, Timmy saved the lenders, not American savers. Ching Ching to the Federal Reserve Club of New York!


Short term bond yields are breaking out to the upside this morning, with 3-month Treasuries hitting new YTD highs at 0.15% and 2-year yields breaking out to the upside above my intermediate term TREND line of 0.86%.


You didn’t just lose the public with this Great Depression narrative Mr. Geithner. You “kind of” lost whatever credibility was left in considering yourself, Larry Summers, and Robert Rubin the smartest guys in the room. In real life, smart people can get things really wrong.


What America fears now is very well placed. America fears the Perceived Wisdom of government bureaucrats. You guys simply don’t know what you don’t know. Please save us from having to endure watching your PR campaign. It reeks of the Bubble in US Politics that this marketplace’s real-time firefighters now have to manage risk around.


Best of luck out there today,





XLK – SPDR Technology — A down day on 2/22/10 prompted us to buy more XLK. 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.



SPY – SPDR S&P500We moved to neutral (from bearish) on the S&P500 on the week of February 22. At 1139, for the immediate term TRADE, we’ll go back to bearish. This market is finally overbought. We shorted SPY on 3/5/10.


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 again on 3/5/10 as every sovereign debt risk has a time and price to be short of. We 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.


Keith moved to neutral (from bearish) on the SP500 on the week of February 22.   On Friday at 1139, for the immediate term TRADE, he moved back to bearish and shorted the S&P 500. This market is finally overbought!


The S&P 500 finished out last week on a strong note, with the S&P500 closing up 1.4% on Friday and up for six straight days.  On the MACRO front, the calendar offered a fairly strong tailwind Friday as February nonfarm payrolls fell less than expected.   In addition sovereign concerns continued to wane with the New Greek austerity package and the success of its 10-year bond sale. 


In addition, there were no surprises out of China, as Premier Wen reiterated his aim of supportive fiscal policy and appropriately accommodative monetary policy.  As a result, the VIX continues to confirm the RISK AVERSION trade.  VIX declined 10.67% last week and today’s setup of the Hedgeye Risk Management models have levels for the volatility Index (VIX) at:  buy Trade (17.29) and sell Trade (21.54).  The VIX continues to be broken on all three durations – TRADE, TREND, and TAIL.


As we highlighted in our morning meeting, the Financials sector continues to provide leadership to the upside; the Financials were the best performing sector on Friday, rising 1.9%.  The banking group led the way with the BKX +2.5%; regional and money-center names both out performed. 


The employment data seemed to be a big catalyst for the Financials given the implications for the credit cycle.  On Friday, nonfarm payrolls fell 36,000 in February vs. consensus expectations for a 68,000 decline.   The unemployment rate held steady at 9.7%, while a Bloomberg survey was looking for 9.8%. Also note that the household survey showed a 308,000 increase in employment following the 541,000 gain in January.  Average weekly hours fell a less-than-expected 0.1 to 33.8 in February, though average hourly earnings rose just 0.1% month-to-month and 1.9% year-over-year.


On Friday, Technology (XLK) moved to positive on TRADE and TREND.  That leaves Utilities the only sector broken on TREND.  Within the Technology, AAPL was up +3.9%, a bell weather for the group, broke out to new all-time highs after announcing that the iPad will be available in early April.   We continue to be long the XLK.


Commodity-related equities largely outperformed on Friday.   The RECOVERY theme got a boost on Friday from the February jobs number as the Energy (XLE) and Industrials (XLI) outperformed the S&P 500.  Although, it should be noted that the dollar was down slightly on Friday and only up slightly for the week.  Today’s set up of the Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (80.08) and sell Trade (81.07). 


As we wake up today, equity futures are trading modestly below fair value in what appears to be a slow start to the trading week on the heels of last week's move in the S&P.  Today's MACRO calendar is void of any significant events.  As we look at today’s set up the range for the S&P 500 is 37 points or 2.3% (1,113) downside and 1.0% (1,150) upside. 


In early trading copper is trading higher for a second day as the weaker dollar and signs of improvement in the U.S. economy increased investor demand for copper.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.33) and Sell Trade (3.49).


Gold is slightly lower in early trading, despite the dollar trading slightly lower.    The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,122) and Sell Trade (1,149).


In early trading, oil is trading at a two-month high above $82 a barrel in New York amid growing confidence that the economic recovery is proceeding and set to increase demand.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (79.74) and Sell Trade (82.13).


Howard Penney

Managing Director














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