• run with the bulls

    get your first month

    of hedgeye free


Domestic Pigs (Continued)...

One of the great advantages of being in my seat now versus the one I sat in while I was on the buy-side is that I have the opportunity to position myself at the hub of an exclusive research network – our own.


Many buy-side analysts and portfolio managers often share their research findings/anecdotes with our team real-time. Given that we don’t have a prop desk or run our own fund on the other side of client trades, I tend to get better information than I used to get.


Here’s a great note from one of Boston’s star senior buy-side analysts about how state finance really works.

Thanks again for all of your research contributions. We appreciate every one of them.




Unedited –




I have been looking at a house in Boston suburb, but realized that close to 1 acre of the 1.3 acres is on wetlands or restricted land.  So I went to town hall and had a # of eye opening discussions.   


First I went to Conservation and learned that the assessed value was already using a 5% discount b/c of the restrictions on the land, so I wouldn’t be able to get a tax break.    Then I went to the people that do assessments, and confirmed the assessed value of the house is $1.15 mm, while the asking price for the house is $850k.  (only 1 house in this town has ever sold for more than $1 mm).   This house has been on the market for 4-weeks with no bids.  I asked how soon I could get the assessed value lowered for tax purposes if I paid 25% less than assessed value.  I learned an interesting thing.  She said “the sale prices is not necessarily a good indicator of fair value”.  I said “really, what is a better indicator of fair value?”   She wasn’t sure, but said sometime people are forced to sell.  I asked if there were ever times when sale prices were higher than fair b/c of a price bubble caused by low interest rates.  She looked cross eyed.  I knew I’d gone too far. 


I conceded her argument and asked when could we evaluate the assessed value.  Evidently the assessed value is calculated once per  year and is based on comparable home sales 2 years ago.  The tax payments are made monthly, so the payments in for the Sept and Dec qtr are based on theoretical value – which they calculate by increasing the previous run rate 2%.  I asked – so basically you assume home values go up ever year.  She said “yes, but we don’t want to pass the whole increase through right away, so that’s why we only apply a 2% increase.”  I then said – “so you assume home values go up more than 2% every year”…. She agreed.


I went to tax collectors department and got the tax payments the house has made in the last 2 yrs.  I said, “If I buy this house for 25% less than the assessed value, don’t you think I’ll be paying lower taxes in a few years?”   She said, “no, probably not, because if the value were to actually fall, they’d just have to increase the tax rate because the town’s budget is dependent on those tax dollars.”


I couldn’t believe it.  I know I wasn’t dealing with the most educated people – but the assumption is still prices go up every year.  What is going to happen in 2 years when we are using comps that show falling market values?   Many states are already insolvent and it is only going to get worse, or they jack up tax rates and those overlevered families get squeezed out.  Am I missing something??? I know the market can rise and fall 80% a number of times in the next few years, but with this secular challenge…. How do we not keep moving lower?



R3: Revisions Revisited


March 15, 2010


The earnings season is now pretty much over and the better than expected results were met with a sizeable move to the upside for the retail sector. So after a major “sell the news” day that came with better than expected same store sales in early February, we’ve seen the opposite reaction just one month later. So what gives?





The earnings season is now pretty much over and the better than expected results were met with a sizeable move to the upside for the retail sector. So after a major “sell the news” day that came with better than expected same store sales in early February, we’ve seen the opposite reaction just one month later. So what gives? Now good news is actually good news for a change. Perhaps it’s the group’s high short interest or the reality that there is still a quarter or two of easy compares. Earnings appear to be heading higher, at least for the first half of the year. Whatever the reason is, after a brief pause, the earnings revision factor appears to be on the upswing.


However, reality is also setting in and the consensus earnings growth rate for the next twelve months is now just 19% (down from 27% when we last ran the numbers on February 8th. and now being measured off of a much higher base which includes 4Q09). Everyone knows comparisons are tough on many fronts in the back half, but it now appears this reality is finally being incorporated into guidance and expectations. Commensurate with the drop in expected growth is a slight reduction in the group’s forward multiple, which now hovers around a 19x P/E- a full point lower than our last reading. While it may be a subtle change, especially against a strong tape for retail, it’s becoming more clear that sustaining peak growth and peak margins is becoming a more difficult task.


R3: Revisions Revisited - NTM and Consensus Chart short term


R3: Revisions Revisited - 90 Day chart short term


R3: Revisions Revisited - Valuation Table


Eric Levine





  • Good news. Target’s collaboration with Liberty of London appears to be a huge success, even before the national rollout begins today. The company’s pop-up store in Bryant Park, NYC was so successful it ended up closing almost a full day early after selling out. The buzz online is also widespread, with bloggers and fashionistas declaring this the best designer collaboration the company has done in years. 
  • In an effort to drive customer traffic and meet the demands of consumers seeking value, Ann Taylor has taken dramatic cuts to its initial retail pricing. Across the board, average initial retails are down 15% year over year. Pants and sweaters are two categories that received the biggest pricing adjustments, while suiting and accessories remain unchanged. 
  • Hibbett’s noted that it had 96 real estate deals agreed upon by landlords in 2009, but only 42 stores actually came to fruition. The remaining stores that did not move forward were the result of developers and landlords that were unable to secure loans or get their projects built. Despite the difficulties in getting new stores opened, Hibbett’s remains committed to accelerating store opening growth beyond the 3-4% current run-rate when the environment allows. 




Hanesbrands Focuses on Innerwear Growth Initiatives - After declines in annual profits and sales, Hanesbrands Inc. wants to leverage its brand muscle in the innerwear sector. The apparel giant has set a goal of growing through international expansion in countries such as China, India, Brazil and Japan, acquiring a midsized company with annual volume of $200 million and tapping several retail partnerships, including a multiyear contract with Wal-Mart Stores Inc. to be the sole supplier of plus-size women’s apparel and select innerwear through the Just My Size brand. The deal is projected to generate sales of $50 million to $75 million this year. Hanesbrands, which spun off from Sara Lee Corp. in September 2006, is seeking to generate annual net sales growth of 2 to 4 percent and yearly earnings per share gains of between 10 and 20 percent over the next several years. In fiscal 2009, the Winston-Salem, N.C.-based company reported profits of $51.3 million, or 54 cents a share, compared with $127 million, or $1.34 a share, in the previous year. Revenue fell 8.4 percent to $3.89 billion. The company in January reported a fourth-quarter loss of $1.1 million. In an industry that’s been transformed by consolidation for almost two decades, Hanesbrands retains a powerful portfolio that includes Hanes, Champion, Playtex, Bali, Wonderbra and L’eggs. The innerwear unit, which consists of intimate apparel, men’s underwear and socks, generated wholesale sales $1.83 billion in 2009.  <wwd.com>


Phillips-Van Heusen Said to Be Close to Hilfiger Deal - Phillips-Van Heusen Corp. may reach an agreement to buy apparel maker Tommy Hilfiger from Apax Partners LLP for about 2.2 billion euros ($3 billion), according to a person briefed on the discussions. A cash-and-stock deal may be announced as soon as today, the person said. The talks were reported yesterday by the New York Times. Apax, the London-based private-equity firm, bought Tommy Hilfiger in 2006 for about $1.6 billion. A purchase would add Tommy Hilfiger, which introduced its first menswear collection in 1985, to Phillips-Van Heusen clothing lines that include Calvin Klein and Izod. Phillips-Van Heusen is seeking brands that can grow globally and boost profitability, Chairman and Chief Executive Officer Emanuel Chirico said last week at a Bank of America Merrill Lynch investor conference. He declined to identify potential targets. “What is key to us is a strong brand that has enormous growth potential in North America and around the world,” Chirico said at the March 11 conference. “Any acquisition we do would be accretive to margins in the first full year.” <bloomberg.com>


VF Corp. to Open Panama Sourcing Office - VF Corp. will establish a supply chain office to manage purchasing in the Latin America region in Panama City, Panama by October, The Business Journal of the Triad Area reported. The news indicates a growing committment to manufacturing and sourcing operations in the Western Hemisphere at a time when many apparel makers are looking for closer-to-home sourcing alternatives to Asia and particularly mainland China. VF's Outdoor Coaltion already sources much of its fleece from Central America. VF Corp. told The Business Journal it will also be relocating an office currently in Plantation, Fla. VF Corp. expects to eliminate up to 20 positions at its Greensboro, NC headquarters as part of the changes with some of those employees being offered the opportunity to relocate to Panama. <sportsonesource.com>


Cartier Launching E-Commerce in U.S. - Cartier is launching e-commerce in the U.S. today, a key initiative in the fine jewelry and watch industry, which until recently has been wary of the virtual marketplace. Emmanuel Perrin, Cartier North America president and chief executive officer, said the demand for online selling is too great to ignore. Branded fine jewelry and watches are fairly new to the buying on the Internet, partly because a lot of the merchandise sold online in the U.S. involves counterfeit, diverted or gray goods offered at lower prices. However, advanced technology — Tag Heuer, for example, has created a special hologram to denote an authorized e-tailer — has enabled more brands to get in on the act. In recent years, De Beers, Bulgari, Harry Winston and Boucheron began selling jewelry and watches on their Web sites. Cartier launched e-commerce in Japan in 2008. Last year, Cartier tested a “call-to-purchase” service on cartier.us, which was a step on the road to an e-commerce presence. Perrin predicted cartier.us will be one of the firm’s top five producing stores in the U.S. by 2012. The Web site offers styles from the firm’s multiple categories including jewelry and timepieces. High jewelry, corrective eyewear and engagement rings are not being sold online. The Web site offers accessories and fragrances with retail prices starting at $80 for a business card holder and ranging to as much as $16,000 for a piece of jewelry or a watch. The broad assortment of Cartier’s iconic Love, Trinity, Santos and Tank collections also will be sold.  <wwd.com>


Nike Brand Awareness Pushing 99% for Athletic Footwear Buyers - Even before the most recent Olympic Winter Games gave it yet more lift in the market place, the Nike brand was recognized by nearly 99% of all respondents to a recent survey conducted by The SportsOneSource Group as a component of its annual Brand Strength Report. Brand awareness was 98.8% among the consolidated respondent pool aged 13 years old and up that had purchased athletic footwear or apparel over the past year.  Somewhat surprisingly, the awareness level for female respondents was slightly higher than the male group, topping out at 99.1% awareness.  Adidas was second in brand awareness at 95.2% and Reebok/RBK brand awareness stood at 93.2%.  Converse (87.6%) and Puma (86.1%) rounded out the top 5. The brand awareness responses in the survey, which was conducted in late 2009, are a key component in the firm’s annual Brand Strength Report and the formulation of the Brand Strength Index.  The Brand Strength Index was formulated in early 2009 by The SportsOneSource Group in an effort to more effectively measure the overall consumer perception of a specific brand.  Each brand measured was tested across four main criteria, with those criteria each individually weighted to reflect their importance in the overall indexing formula.  <sportsonesource.com>


Even without sites customized for foreign markets, global sales are rising - Few U.S. retailers offer web experiences tailored to consumers in foreign countries, but many nonetheless are reaping online sales from abroad. 14.5% of the 75.2% of merchants selling internationally, which includes Canada, report that in 2009 more than 25% of their total web sales came from customers outside the United States, according to Internet Retailer’s new international e-commerce survey of 247 web-only retailers, chain retailers, catalogers and consumer brand manufacturers. 4.8% report 21% to 25% of sales came from outside the borders of the country, 7.0% report 16% to 20%, and 5.9% report 11% to 15%, the survey finds. 9.1% say 8% to 10% of 2009 sales were derived from international shoppers, 12.4% report 5% to 7%, 18.3% say 2% to 4%, and 28.0% report less than 2%. Of the 24.8% not selling internationally, 60.3% are assessing the viability of selling to consumers outside of the United States; and, of those merchants, 70.3% plan to start selling internationally within a year. According to the survey, however, only 18.6% of U.S. merchants offer a currency converter, 15.4% show the fully landed cost of delivering an item to the consumer’s door in local currency, 15.4% offer product content in a local language, 15.0% feature customer service content in a local language, and 14.2% offer telephone support in a local language. <internetretailer.com>


E-retailers make gains in multiple customer service channels, study finds - Online retailers posted gains in just about every area of customer service—from e-mail to self-service to contact center—according to a test by eGain Communications Corp., a provider of customer service software. Analysts conduct the test annually by “mystery shopping” the web self-service and contact center customer service at 175 companies spread across eight industries—financial services, retail, communications, consumer goods manufacturing, insurance, health care and pharmaceuticals—in the U.S. and Canada. Online retail’s overall service score was 2.3, up from 1.8 a year earlier. The average score across all industries was 1.8. eGain considers scores less than 1.0 poor; less than 2.0 below average; less than 3.0 above average; and 3.0 or better exceptional. “Retail sector performance was a bright spot in this year’s ‘mystery shopping’ customer service research,” says Anand Subramaniam, eGain vice president of marketing. “However, channel silos still remain across knowledge, policy and process.” Following are online retail’s customer service scores in each evaluated category, along with the previous year’s score:

  • E-mail: 3.0, up from 2.5
  • Self-service: 2.4, up from 1.9
  • Choice: 2.3, up from 2.0
  • Cross-channel: 1.9, up from 0.9
  • Cross-agent: 1.9, down from 2.0
  • Telephone: 2.7, n/a



Americans Say Jobs Top Problem Now, Deficit in Future - Unemployment now stands alone as the top issue in Gallup's latest update on the most important problem facing the country. Thirty-one percent of Americans mention jobs or unemployment, significantly more than say the economy in general (24%), healthcare (20%), or dissatisfaction with government (10%).

R3: Revisions Revisited - G1
This month, unemployment overtook general mentions of the economy, as the percentage naming unemployment held steady at 31% while the mentions of the economy dipped from 31% to 24%. Unemployment, the economy, and healthcare have been the top three cited problems each month since last May.

R3: Revisions Revisited - G2
The economy had ranked No. 1 in Gallup's monthly most important problem measure since February 2008, when it overtook the Iraq war. The war in Iraq had been the top issue (or tied for the top) each month since April 2004. Thus, unemployment's position at the top of the list marks the first time in six years that something other than Iraq or the economy in general has led Americans' list of national concerns. More broadly, the economy's struggles are apparent, as 66% of Americans mention some economic issue as the nation's most important problem. At least half of Americans have done so each month since March 2008. <gallup.com


The Macau Metro Monitor, March 15th, 2010



At the end of the fourth quarter of 2009,

  • Wholesale & Retail Trade had 29,211 paid employees, up 12.3% y-o-y with average earnings (excluding bonuses and allowances) for full-time employees up by 5.7% y-o-y to MOP9,090
  • Transport, Storage & Communications had 7,658 paid employees, down 2.0% y-o-y while average earnings for full-time employees increased by 1.1% y-o-y to MOP15,090
  • Security Activities had 3,749 paid employees, down 4.1% y-o-y with average earnings for full-time employees up 4.7% y-o-y to MOP7,830
  • Public Sewage & Refuse Disposal Activities had 623 paid employees, down 5.3% y-o-y while average earnings for full-time employees decreased 6.4% y-o-y to MOP10,520.

At the end of December 2009, Wholesale & Retail Trade reported 3,380 vacancies, up substantially by 95.6% y-o-y; Security Activities had 590 vacancies, a y-o-y increase of 23.9%, while the Transport, Storage & Communications sector had 284 vacancies, down by 9.3% y-o-y.

The Angry Client

“I’m not upset that you lied to me, I’m upset that from now on I can’t believe you.”

-Friedrich Nietzsche


With every crisis, there comes both a cost and an opportunity. One of the most obvious costs coming out of the global financial crisis is trust. Whether it be between the American people and Washington or China and Washington, it’s all one and the same. No one trusts Washington.


When people lie to you, you get upset. When those same people start telling you what to believe, you get angry. This morning you are seeing headlines from China’s Premier Wen Jiabao who is going after Washington for “finger pointing.” The Client is angry.


As he wound down his parliamentary meetings last night, Wen said, “we oppose countries pointing fingers at each other and even forcing a country to appreciate its currency” and then he focused his finger on America in saying that it needs to “take concrete steps to reassure investors” that there is “safety” in dollar based assets. Translation: put a muzzle on Chuck Schumer, and focus on fixing your own balance sheet problems.


For the past 18 months we have affectionately labeled China, The Client. So who is The Angry Client? Is it the conservative American saver who gets zero percent returns on their hard earned savings accounts so that the Piggy Banker Spread can get Wall Street stocks and bonuses back on track? Or is it America’s Chinese creditor? It’s both.


Per its Premier’s comments last night, here’s a focus list of what angers The Chinese Client:

  1. US Dollar Policy
  2. US Fiscal Policy
  3. US Trade Protectionism
  4. US Foreign Policy on Weapons Sales to Taiwan
  5. US President Obama meeting with the Dalai Lama
  6. US Corporates attempting to set Foreign Policy (Google)

Per its citizens last week, here’s a focus list showing the anger of The American Client:

  1. AFTER the SP500 ramped +3.1% in the 1st week of March, the ABC/Washington Post Consumer Confidence reading remained at minus -49 (vs. -49 in the wk prior). Just awful.
  2. AFTER the SP500 has ripped those Selling Fear in February for a +8.7% move to the upside (Feb 8th to March 12th), Friday’s University of Michigan Consumer Confidence report put in a lower-high, decelerating to 72.5 in March versus 73.6 in February.
  3. AFTER putting the rest of America on hold for his final countdown healthcare tour, President Obama’s approval rating hit a new low last 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).

Yes, willfully blind ones of the Bubble in US Politics, you have a secular problem on your hands. It’s called trust, and it can’t be bought and paid for like your political careers. You can tell me I am lying, but the score doesn’t. Despite a 69.9% rally in the SP500 since March 9th of the 2009 said “great depression”, this is one of the most explosive global votes of no-confidence that we have ever seen. Ever, is a long time.


So where do we go from here? I’m not smart enough to solve for this, so I say every man for himself. We already have raised a 61% position in cash in our Asset Allocation Model. We have a 6% position in US Equities entirely allocated to Healthcare (XLV) because we don’t trust Nancy Pelosi will be successful scaring the horses with reform much longer. We are short the SP500 (SPY) after it made a lower-high on Friday, closing at 1149.


As opposed to the bullish conviction I started to build in the spring of last year, now I do not think that the answer on where global equity, currency, bond, and commodity markets go from here is as clear. In a new world order that doesn’t have trust, what else is there to move forward with?


Accepting that uncertainty drives a dynamic and interconnected global marketplace is a good place for us all to start. With that said, I can tell you with 100% certainty, that the US stock market is either going up or down from here and our collective distrust for those running this joint will remain.


My immediate term support and resistance lines for the SP500 are now 1135 and 1160, respectively.


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.



FXE – Currencyshares EuroWe've been saying the shorts would get squeezed to the top end of our immediate term TRADE range for the Euro at $1.37. And they have. Timing is always critical. We took our shot on 3/12/10. 


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 was little changed on Friday after trading in a relatively narrow range, while volume improved 7% day over day.  On the MACRO front, last week ended with mixed signals from the February retail sales (slightly better) and the March University of Michigan Confidence data (disappointing).


On Friday, February Retail Sales were +0.3% vs. consensus (0.2%); ex-autos +0.8% vs. consensus +0.1%.   Rising gas and food prices, accounted for nearly 60% of the monthly gain in February sales and over 100% of the revised January sales data.  We continue to believe that inflation issues that the consumer faces are real and are supportative of our belief that the FED is behind the curve on its interest rate policy.


The inflation the consumer feels in his wallet is being played out in the lack of confidence.  The March preliminary University of Michigan Confidence came in at 72.5 below consensus of 74.0 and a final February reading of 73.6.  Despite a 70% move in the S&P 500 since the lows last March, Americans don’t trust the rally. 


Despite the stalled confidence figures, Consumer Discretionary (XLY) continues to be the “pain trade.”  The XLY was the third best performing on Friday, last week and year-to-date.  The better than expected February retail sales helped retail overcome an unexpected drop in confidence and a downward revision in January Retail Sales.


The Dollar index traded down for three straight days last week, declining 0.6% on Friday.  The Hedgeye Risk Management models have levels for the volatility Index (DXY) at:  buy Trade (79.79) and sell Trade (80.82).  Dollar weakness provided a tailwind for Materials (XLB) and parts of the REFLATION trade.   


Volatility lost 2.7% on Friday, but gained 0.9% for the week.  The VIX continues to be broken on TRADE, TREND and TAIL.  The Hedgeye Risk Management models have levels for the volatility Index (VIX) at:  buy Trade (17.10) and sell Trade (19.22). 


As we wake up today, equity futures are trading below fair value ahead of a week which includes a number of key MACRO data points on inflation, housing, and industrial production reports and a FED policy meeting.  As we look at today’s set up the range for the S&P 500 is 25 points or 1.3% (1,135) downside and 0.8% (1,160) upside.


Today's MACRO highlight will be:

  • Empire Manufacturing
  • TIC Flows
  • US Industrial Production for February
  • US Capacity Utilization for February
  • NAHB Housing Market Index for March

In early trading, copper is trading lower, extending the decline from last week’s loss on concerns that China will continue to slow growth after inflation rose to a 16-month high.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.23) and Sell Trade (3.39).


Gold is trading higher in early trading higher after hitting a two-week low last week.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,097) and Sell Trade (1,122).


Crude oil is trading lower for a second day ahead this week’s OPEC meeting in Vienna.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (79.57) and Sell Trade (83.10).


Howard Penney

Managing Director














investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.