• run with the bulls

    get your first month

    of hedgeye free


The Week Ahead

The Economic Data calendar for the week of the 15th of March through the 19th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2

Who Do Americans Trust?

We held a very interesting in-house conference yesterday in New Haven. Our goal was to take half a day, away from our screens, to think.


One of our latest hires, Diego Scataglini, talked about trust and how American society is losing theirs. Interestingly, almost 4x the amount of people in America believe in ghosts than they currently trust in the US government.


This isn’t a political point. This is a point about politics. AFTER the US stock market has tacked on a +70% rally to the upside, and AFTER the entire global economy has recovered from the said “great depression” of some who missed an annual bonus, this is what you get – the score:


1. AFTER the SP500 ramped +3.1% last week, the ABC/Washington Post Consumer Confidence reading remaining at minus -49 (vs. -49 in the wk prior).


2. AFTER the SP500 has ripped those Selling Fear in February for a +8.8% move to the upside (Feb 8th to March 12th), this morning’s University of Michigan Consumer Confidence report put in a lower-high, decelerating to 72.5 in March versus 73.6 in February (see chart below).


3. AFTER his final countdown healthcare tour, President Obama’s approval rating hit a new low this week (The Rasmussen Reports daily Presidential Tracking Poll for Wednesday showed that 22% of the nation's voters Strongly Approve of the way that Barack Obama is performing his role as President. Forty-three percent (43%) Strongly Disapprove giving Obama a Presidential Approval Index rating of -21. That matches the lowest Approval Index rating yet recorded for this President).


What gives?


Americans don’t trust the rally, and Americans don’t trust the government. Now that the immediate term (TRADE) bubble in gold has popped, and the intermediate term (TREND) bubble in US Treasuries keeps popping, I guess the only bubble we have left to make a call on is the one that we have held out on our longest duration (the TAIL) – the Bubble In US Politics.


Its sad, but these numbers don’t lie; politicians do.



Keith R. McCullough
Chief Executive Officer


Who Do Americans Trust? - um


R3: Three for Friday


March 12, 2010


This morning we highlight three earnings reports from three totally different businesses that reported over the past 24 hours. Yes they were all positive relative to expectations, but underlying the results are some interesting callouts.





This morning we highlight three earnings reports from three totally different businesses that reported over the past 24 hours. Yes they were all positive relative to expectations, but underlying the results are some interesting callouts.


ZQK- Clearly on track here toward a recovery in margins, driven primarily by very tight inventory management. Inventories ended the quarter down 21%, with about two-thirds of the decline coming from the company’s domestic segment. This is a dramatic decline in light of what was only a 2% decline in revenues. Additionally, management now expects to see about $75 million in free cash flow this year vs. prior expectations for $50 million. While it is clear that the risk profile of ZQK has been substantially improved over the past year, the key question here will be if the reduction in inventory may now actually inhibit sales recovery in the near term.


R3: Three for Friday - ZQK SIGMA


ARO- Another slight beat for Aeropostale after earnings moved higher throughout the quarter. No surprise here. What is more interesting is the company’s focus on driving AUR’s higher over the course of 2010. This is clearly a key focus because it will be absolutely necessary if the company is going to drive same store sales higher on top of very difficult comparisons throughout much of this year. Management believes it can drive AUR’s higher in two ways- adding more fashion product to the mix at higher price points and through more effective use of technology which will reduce markdown exposure. Both strategies appear to be slightly more risky than the traffic driven gains that have been a dominant factor in the company’s outsized growth over the past year.


R3: Three for Friday - ARO SIGMA


HIBB- This morning’s strong 4Q results from HIBB are not exactly a surprise given recent positive sales read-throughs out of both FL and DKS, as well as the anticipated boost from a couple of one-time benefits (i.e. Alabama and New Orleans football championships). That said, there are some notable callouts. Comps up 9.6% reflects a massive acceleration on both a 1Yr and 2Yr basis – a statement that holds true even when considering core comps were roughly +6% (ex the 1x events). Inventories continue to improve as evidenced by the first positive sales/inventory spread in the last four quarters. Despite some speculation about whether or not the company was going to give guidance, an initial fiscal 2011 outlook of $1.12-$1.30 was provided (Street at $1.18). Similar to Foot Locker, with a portfolio over indexed towards NKE product (50%+), we believe the company is well-positioned to benefit from the impending improvement in the product cycle which will be beginning over the next 3 to 6 months.


R3: Three for Friday - HIBB S 3 10




  • Quicksilver noted that its strongest performing region was the West Coast in its company owned retail stores. However, unlike most retailers, its business in Florida has not shown a sustained pick-up yet. 
  • PacSun management noted that efforts to re-enter the footwear business during the holiday were limited by small assortments available only in select stores. By March, the company expects to have a broader assortment available in 200 doors, with a ramp in product depth and store penetration building into back-to-school. 
  • Williams Sonoma remains focused on increasing the productivity of its ecommerce business and believes there is still a great opportunity to increase conversion on its sites. A 30 bps improvement in conversion would yield an additional $100 million in revenues. The company is currently testing technology to serve personalized or tailored content to its customers in an effort to boost purchase behavior. 
  • After a brief test phase, Google rolled out a new search feature which allows consumers searching for a specific product to see if the item may be in stock at a local retailer. The initial launch includes local in-store inventory information for retailers including Best Buy, Sears, Williams-Sonoma, Pottery Barn, and West Elm. While this technology has existed for individual retailers on their respective sites, this is one of the first efforts to aggregate local inventory data on a real time basis. 




Abercrombie Will Keep Discounting - Abercrombie & Fitch Co. said Wednesday that it will continue its uncharacteristically high levels of discounting through the spring in order to boost store sales. Jonathan Ramsden, chief financial officer of the New Albany, Ohio, teen clothing retailer, said it is willing to sacrifice margins if necessary to improve sales. Average unit prices, which were down 14% in February on higher discounting, will continue to be "down quite significantly" for the first half of the year, Mr. Ramsden said. The company accept some "gross margin erosion for the season" so long as it is "effective in increasing productivity," Mr. Ramsden said at a Bank of America investors' conference. Abercrombie, which also operates the Hollister and Gilly Hicks brands, reported sales at stores open at least a year declined dramatically in 2009. After a string of double-digit monthly decreases, the company is focused on posting sales increases this year. Mr. Ramsden said it hopes to report same-store sales increases for the entire year, as well as on a monthly basis, but warned the road to recovery could be choppy. The company is also in the process of examining its real estate portfolio and has identified more than 200 underperforming stores. About half of those are locations with leases that come due in the next three years, Mr. Ramsden said, at which point the company will vacate the space. The bulk of the store closures will be in its namesake brand. The company hopes cutting back their ubiquity will help restore Abercrombie & Fitch's reputation as a premium brand. <wsj.com>


H&M Plans 240 New Stores This Year - Karl-Johan Persson, H&M's chief executive officer, has said the company plans to open 240 new stores this year and that the economy will be "a little better" than in 2009. Persson was in Tel Aviv, where H&M's first store is just opening. Another seven are planned for Israel. He added that H&M doesn't plan to exit any markets and that it is pushing ahead with investment plans in Spain, Portugal, Italy and Greece. The Swedish retailer (Europe's second-largest clothing retailer) reported sales in January rose 11 percent, while sales at shops open at least a year increased 1 percent. <licensemag.com>


Warehouse Plans NZ$100 Million, Five-Year Expansion - Warehouse Group Ltd. plans to spend as much as NZ$100 million ($70 million) the next five years opening new stores and expanding its product range to grab a bigger share of New Zealand’s retail market. The company, 10 percent-owned by Australia’s Woolworths Ltd., will build as many as eight general merchandise stores to add new locations and increase floor space as much as 5 percent, Warehouse said in a presentation today. It will build as many as 10 stationery outlets to increase sales, improve national coverage and almost double the division’s margins by 2014. Warehouse, the nation’s largest discount retailer, is expanding after quitting its unprofitable Australian unit in 2005 and last year halting a shift into groceries and liquor that failed to meet targets. New stores, of the most-profitable size, will help the company lift earnings and recover market share lost to new clothing and hardware stores, Chief Executive Officer Ian Morricesaid today. <bloomberg.com>


Della Valle Adds to Holdings in Saks - Having more than doubled his money on his earlier investments in Saks Inc., Diego Della Valle has boosted his bet on the recovery of the luxury retailer. Through his personal investment vehicle, Diego Della Valle & C. S.A.P.A., the chairman and chief executive officer of Italy’s Tod’s SpA this week spent $22.3 million for an additional 2.9 million shares of the luxe retailer, according to a filing with the Securities and Exchange Commission. The investment comes on top of the 8.48 million shares of Saks that Della Valle acquired last year for $30.3 million. He now controls 11.38 million shares of Saks’ common stock, or 7.1 percent of those outstanding. Among noninstitutional investors, only Mexican telecommunications billionaire and the world’s richest man Carlos Slim Helú has more, with 25.62 million shares of the firm, or 16.1 percent of those outstanding. Saks has proven to be a very good investment for Della Valle. He bought 8.48 million shares of the firm between Feb. 20 and May 7 last year for $30.3 million, an average price of $3.57 a share. As of Thursday’s closing price, that portion of his holdings was worth $67.7 million, making for a $37.4 million gain. <wwd.com>


Ullman, Penney's Break Away From NRF - Myron E. “Mike” Ullman 3rd, chairman and chief executive officer of J.C. Penney Co. Inc., has resigned his seat on the board of the National Retail Federation and will not renew the company’s membership with the trade and lobbying group. Ullman, a recent chairman of NRF, sent a letter Wednesday to current chairman Terry J. Lundgren, who is also president and ceo of Macy’s Inc., to tell him of the decision, according to Tracy Mullin, president and ceo of NRF. Penney’s membership with NRF expires on April 1. A Penney’s spokesman said nine of 10 of the largest retailers, inluding Penney’s, are represented on the board of the Retail Industry Leaders Association and “given the gravity of all of the issues facing large employers, specifically in the retail industry, we made the decision to focus all of our industry advocacy through RILA.” RILA and the NRF called off a merger last June after announcing they were combining their groups in April, but declined to provide details. Ullman also sits on the RILA board. “It appears that he [Ullman] is really more interested in working with big box companies,” said Mullin, referring to RILA, the other key retail trade and lobbying group in Washington. “Clearly he feels a greater affinity there than here. That is the conclusion I draw from this.”  <wwd.com>


Apax, Private-Equity Firms Say Retail LBOs Return With Recovery - Private-equity firms looking to buy retail and consumer companies said they’re now able to finance deals and pay reasonable prices after the credit crisis and global recession triggered a buyout slump. “It feels like it’s a little bit of Goldilocks now,” Alex Pellegrini, a New York-based partner with Apax Partners LLP, said yesterday. “It feels just right.” Buyout managers are getting back to business after the global credit crisis that began in 2007 froze them out of buying companies or selling what they owned. About $12.9 billion worth of private-equity deals have been announced in the past three months, compared with $2.5 billion in the same period a year earlier, according to data compiled by Bloomberg. “The last couple months would suggest that people are getting active again,” said John Howard, chief executive officer of New York-based Irving Place Capital Management LP, noting his firm hasn’t made a retail investment in four years. “We’re seeing more real opportunities.” Financing from Wall Street banks is returning for some deals after financial institutions suffered losses of $1.7 trillion since the onset of the credit crisis. Howard said deals require investors to contribute more of their own cash and less borrowed money, which means he and other managers are most interested in targets they think will boost sales and profits. U.S. comparable-stores sales climbed 4.1 percent in February, topping the 3 percent growth estimate by researcher Retail Metrics. It was the sixth-straight monthly gain and the biggest in more than two years. <bloomberg.com>


Obama Outlines Export Growth Push - President Obama provided a blueprint Thursday for the administration’s strategy to grow U.S. exports to help drive job creation and economic recovery. The initiatives were outlined on the same day a Commerce Department report showed U.S. imports of textiles and apparel rose in January. The export push will include greater access to trade financing — including another $2 billion annually to help small and medium-size businesses — and a new Export Promotion Cabinet to coordinate the government’s efforts. “We’re going to increase financing, advocacy and assistance for American businesses to locate, set up shop and win new markets,” Obama said in a speech to the Export-Import Bank’s annual conference. As part of the plan, more than 40 trade missions intended to promote U.S.-made products have been scheduled for this year — the first went to India this week. There will be more money for promoting exports and Obama said federal agencies would establish public-private partnerships with companies to tap into their expertise about overseas markets and aid firms looking to expand. Obama said the administration also will focus on enforcement of existing trade agreements to give companies a level playing field, and will seek to open more markets through new and pending trade pacts. The President reiterated his call for China to move to a market-oriented exchange rate to help correct global trading imbalances. The National Export Initiative, announced in the State of the Union address, will “substantially increase” companies’ access to trade financing through the Export-Import Bank, Obama said.  <wwd.com


The Macau Metro Monitor, March 12th, 2010



City of Dreams' CEO Greg Hawkins predicts a 20-25% increase in demand over the next 6-7 months. He believes the opening of several new services and infrastructures this year, e.g. "Kids' City" and "The House of Dancing Water," would translate into 40,000-45,000 visitors a day.



According to the Labour Affairs Bureau (DSAL), at the end of January 2010, there were 476 (or .6%) fewer non-local workers in Macau than there were in December 2009. In 2009 there was a 17.5% decline in the the number of imported workers.

 Since October 2008, the numbers of imported workers have been dropping month-after-month from 101,752 to 74,429 in January 2010.  The hospitality and food and beverage sector hired the most imported workers. The entertainment and gaming sector currently has 9,979 foreign workers while the construction industry has 7,168.  The composition of non-local workers includes 41,264 from mainland China, followed by 10,817 from Philippines, 6,591 from Vietnam and 5,481 from Hong Kong. The SAR government remained committed to retaining local workers.

Inflation Taxation

“Inflation is taxation without legislation.”

-Milton Friedman


This week we have focused our Hedgeyes on lying. Markets don’t lie; people do. We get it. But does America’s brain-trust of “smart money” who accuses China of making up their numbers get that we make up ours too? It’s an interesting question for interconnected times…


This morning, we are waking up to Anton Valukas (bankruptcy examiner for Lehman Brothers) accusing ex-Lehman CEO, tricky Dick Fuld, of “being at least grossly negligent.” Ok. When I read that, it seems to make sense. But is it true?


What if we were waking up to the headlines of the Bank of China’s executives being accused of the same? Well, sadly, we know the answer to that question too. Some people in the hedge fund community who are currently short China, would be forwarding the email – “did you see this?”


That’s what people in this business do. Do they see themselves in the mirror? Sometimes. Do they, collectively, understand the hypocrisy of some of their narrative fallacies? Sometimes. I think David Einhorn called this “fooling some of the people all of the time.”


Let’s shift gears to a more actionable matter that considers the umbrella of the same theme – lying about inflation. As my defense partner Daryl Jones pointed out in yesterday’s note, the most obvious problem about reported inflation is that governments report the numbers.


Let’s set aside that problem for a minute and simply consider that even if China and the US are making up the numbers, that the last reported monthly Made-off number is at least apples-to-apples against the current one. Then, lets back that data series up… chart it…  and, for another minute, consider that even if these are Made-up numbers, that they have intermediate TRENDS to discern, relative to themselves.


Now let’s take this a step further and consider both the interconnectedness of global price inflation and two countries that are, for the sake of our standing argument, lying about inflation:

  1. China’s year-over-year Consumer Price Inflation (CPI) – deflation bottomed in July of 2009 at -1.8%; went positive y/y in Q4 of 2009; and is currently running up +2.7% as of January.
  2. USA’s year-over-year Consumer Price Inflation (CPI) – deflation bottomed in July of 2009 at -2.1%; went positive y/y in Q4 of 2009; and is currently running up +2.6% as of January.

Wow. Maybe these guys are in cahoots with one another and making up the numbers together!


At a bare minimum, no matter what your definition of truth, you can’t tell me that China or the USA is experiencing year-over-year DEFLATION in prices. Sure, you can ex-out things that normal people buy, like say gas and food, and say what you will about prices on Park Avenue – that’s fine. But the truth is that, even on your compromised and conflicted calculation, CPI is running up +450 and +470 basis points in China and the USA, respectively, in the last 9-months.


Since March 9th of 2009, the SP500 is up +70.1%. Is that deflationary? Or were Americans so bubbled up on this side of the ocean that we can’t stop lying to ourselves that the 2006-2007 price comparison that Groupthink Inc. will have you believe is the next “great depression” is nothing but just that – another lie?


Depending on how one’s portfolio is positioned this morning, they could well argue that I am making up the numbers to fit my thesis here too. That’s fine. I’ll one up you and suggest then that I am making up numbers about Made-off numbers…


If you want to take the authority on everything that really has scared the life out of people in the last 6-weeks (Sovereign Debt), take Reinhart & Rogoff’s word for it rather than mine. Chapter 12 of “This Time Its Different” is called ‘Inflation and Modern Currency Crashes’ and there’s a great chart on page 181 that shows the median inflation rate (5 year-moving average) for all countries from the year 1500 to 2007.


I know. It’s funny how politicians and liars alike have left out this part of the Piling Debt, Upon Debt, Upon Debt story out of their recent narrative fallacies. This, unfortunately, is how the story always ends – with inflation.


Milton Friedman was right when he said that “inflation is taxation without legislation.” And Mr. Macro Market is right on the pin with this again this morning. Global bond yields have done nothing but go up since the Chinese CPI report from last night. Next week, prepare for India and the USA to make up more of the same trends in their CPI numbers. They’ll be inflationary again too.


My immediate term support and resistance in the SP500 is now 1132 and 1156, respectively.


Have a nice weekend and best of luck out there today,





CAF – Morgan Stanley A Share — Now that all of the inflation data we have been calling for is on the tape, China's stock market looks like it wants to tell us the news is now baked into the expectations cake. Buying China low.


XLV – SPDR Healthcare — Healthcare was down again on 3/9/10 in the face of “Obamacare” inspired fear. While we fear we may be early here, it’s better than fearing fear itself.


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 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.


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 S&P 500 finished higher on another day of very light trading.  While the index was up 0.4% on the day, volume declined 14% day-over-day and breadth of the market deteriorated significantly.  The S&P 500 finished at its highest level since October 2008.


On the MACRO calendar the only meaningful statistic was initial jobless claims and the data was mixed.  While claims dropped 6,000 week over week to 462,000 from 468,000, the 4-week rolling average figure actually rose by 5,000 to 475,000 from 470,000. Yesterday’s number was a clear disappointment, but there is real optimism that jobless numbers will have a tailwind, as census hiring begins to have a positive influence on the data - lasting through May/June. 


Day-over-day, the positive divergence in sector performance yesterday was in Healthcare (XLV).  Within the XLV, the managed care index was up 1.6% on speculation that reconciliation will be difficult to pass.  Republicans declared a parliamentary victory as they challenge the Democrats’ efforts to pass Healthcare legislation.  CVH and AET were the two best performing stocks in the XLV


The Financials continue to take center stage, as the XLF has been one of the top three performing sectors all week.  The banks finished higher for a sixth straight day, with the large-cap regional’s providing the upside leadership for the group; C continues to be the standout in the group. 


Rounding out the top three performing sectors was Consumer Discretionary (XLY).  Yesterday, retail continued to outperform the broader market with the S&P Retail Index +0.8%.  The notable weakness in the sector was centered in the homebuilders; LEN, TOL and DHI were among the laggards. 


Volatility lost 2.7% yesterday and continues to be broken on TRADE, TREND and TAIL.  The Hedgeye Risk Management models have levels for the volatility Index (VIX) at:  buy Trade (17.29) and sell Trade (21.54). 


As we wake up today, equity futures are trading modestly above fair value following yesterday’s outperformance.   As we look at today’s set up the range for the S&P 500 is 24 points or 0.5% (1,132) downside and 1.6% (1,156) upside.


Today's MACRO highlights will be:

  • Feb Retail Sales
  • March prelim U. of Michigan
  • Jan Business Inventories 

Copper is heading for a weekly loss on concerns that China may raise interest rates, slowing demand.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.34) and Sell Trade (3.44).


Gold is lower on speculation that governments around the world could pare economic stimulus measures, therefore dampening demand.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,106) and Sell Trade (1,122).


According to Street Account, the IEA increased its estimate for world demand in 2010 by 70,000 barrels a day to 86.6M barrels a day. That would mean a gain of 1.6M barrels a day, or 1.8%, from 2009 levels. The International Energy Agency raised its forecast for global oil demand this year for a second month as fuel consumption in Asia rises more than expected.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (81.02) and Sell Trade (83.42).


Howard Penney

Managing Director














Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.