R3: Don’t Read Into DSW


March 16, 2010


For reasons I still can’t explain, DSW and PSS still tend to trade in tandem. Yes, they both sell shoes. But the product is different, the box is different, the consumer is different, and the drivers to the story? Yeah…you guess right…they’re different. So of course DSW misses by a penny, guides to the lower end of the consensus range, the stock is off nearly 10%, and it’s taking PSS down with it (albeit not to the same magnitude). 





For reasons I still can’t explain, DSW and PSS still tend to trade in tandem. Yes, they both sell shoes. But the product is different, the box is different, the consumer is different, and the drivers to the story? Yeah…you guess right…they’re different. So of course DSW misses by a penny, guides to the lower end of the consensus range, the stock is off nearly 10%, and it’s taking PSS down with it (albeit not to the same magnitude). 


This is a great shot to step and get involved with one of the few multi-pronged stories in retail today. We outlined this in great detail in our PSS Black Book (dated 9/1/09), but the crux is that a) the company increasingly owns both content and distribution, b) some big competition (WMT) is de-emphasizing the footwear business, c) PSS has made structural changes in its model that increases speed to market, d) it finally has the systems in place to be in touch with the right consumers – and market the right product to them in the right channels, e) can, and will, both drive higher AURs on top of increased traffic. Ultimately, the consensus estimates are too low – as proved this quarter and should prove again in 2010.


Many people are concerned about the trajectory of retail earnings as we head into the summer, after we anniversary the easy sales/margin comps and how a team manages a business actually begins to matter again. Take a look at the chart below. This is how we think PSS will stack up. We should see a revenue convergence between PSS and the industry (keeping in mind that the industry numbers include 60 retailers who are growing square footage while PSS is not), and margins turning heavily in PSS’ favor.


There’s not a whole lot of safety in retail in 2010. I think PSS is an exception.  


R3: Don’t Read Into DSW  - 1




  • While some may not realize the scope of the PVH/Tommy Hilfiger merger, it’s worth noting that this marriage creates a global platform with substantial scale. With expected revenues of $4.8 billion, the combined entity will rank as the world’s 4th largest apparel platform, behind VF Corp, Ralph Lauren, and Esprit. Approximately 63% of sales will originate domestically, with the remaining primarily centered in Europe and Asia. 
  • A UK paper is reporting that fake Ugg’s are leading to foot problems among young women. The article suggests that medical experts are warning against wearing the poorly crafted knock-offs after seeing an increase in cases of foot pain and backaches. Sounds like one of the better methods to combat sales lost to counterfeiters. We wonder how long it will be before Croc’s gets their Dr’s note… 
  • Keep an eye on upscale Brazilian athletic-wear retailer, Track and Field, which finally opened its first US store in Manhattan. The upper east side location is just one of six planned for Manhattan with additional locations set for Boston, Chicago, Florida, Atlanta, and the Hamptons. The store employs a unique merchandising presentation in which customers can try on sample product that is displayed on hangers, while the saleable inventory is packed in plastic capsules that line the entire wall. Once a customer decides on a style and fit, the employee retrieves the capsule to complete a sale. 




Wal-Mart to Expand Its Financial Services - Wal-Mart Stores Inc., years after a failed effort to obtain a bank charter, plans a 50% increase this year in the number of the company's stores offering bank-like services. The expansion would push the number of Wal-Marts with "Money Centers" to 1,500, or a little less than one for every two Wal-Marts in the U.S., giving the nation's biggest retailer a financial presence that only a handful of banks have. Wal-Mart plans to open its 1,000th money center Tuesday. The money centers cater to millions of the retailer's lower-income customers who don't have a bank account or significant relationships with a bank. The federal government estimates that the category accounts for one in four U.S. households. "We think banks are not as interested in this customer and have a lot of other things on their plates," said Jane Thompson, president of Wal-Mart Financial Services. "So we see a lot to service customers' basic financial needs." Ms. Thompson described the money centers, which do three million to five million transactions a week, as "a very profitable part of our store," although the retailer didn't offer any specific numbers. Ms. Thompson said the centers are "getting way-above-average" comparable-unit growth and return on investment, because the units are cheap to put into stores. <>


Nike Files Lawsuit Against Counterfeit Websites - Nike Inc. has filed a lawsuit n U.S. District Court in Virginia seeking to gain control over 66 Internet domain names it claims are selling counterfeit goods. According to the Portland Business Journal, all the domain names are registered to entities in China. The domain names were registered through VeriSign Inc. in Dulles, Va. Nike is seeking an injunction to have VeriSign transfer the names into Nike's control. Nike's lawsuit does not seek any financial compensation, though the company argues that the domains - using names such as, and - are being used to sell unlicensed or counterfeit products with the company's trademarks. "Through such actions, Nike is irreparably damaged through consumer confusion, dilution and tarnishment of its valuable trademarks," the company said in court documents.  <>


True Religion to Open Branded Retail Store in London; Marks the Debut Store in the UK - True Religion Apparel, Inc. today announced that the Company's first branded retail store in the UK is scheduled to open in June of 2010 in London. Located at 27 James Street, the 1,507 square-foot store will be a freestanding location in heart of London's vibrant Covent Garden district. Similar to True Religion branded retail stores in the U.S., the store will offer shoppers the entire True Religion collection for men, women and kids, including its signature jean styles, its expanding denim, sportswear and handbag collection, and a full range of licensed merchandise. One the busiest shopping and tourist destinations in the UK, Covent Garden is home to several premier retailers, including Mulberry, Hugo Boss, Paul Smith, All Saints, Ted Baker, Karen Millen and Diesel. In addition, a flagship Apple store is under construction. The Covent Garden district will also benefit from the planned redevelopment of Covent Garden Market, which will include new restaurants, retail, and boutique hotels. <>


Nike Again Dominates SportsOneSource Brand Brackets for 2010; Adidas Second - With the field of 65 teams now set for the 2010 NCAA Division I Men’s Basketball Championship, Nike will once again be the brand seen the most by viewers of the event, as 77% of the teams (50 total) in the field will sport the Swoosh in some form, either as footwear, uniforms, or both. That percentage does not include the two teams who will be outfitted by the Jordan brand, a Nike subsidiary. Nike is guaranteed at least one entrant in the Final Four this year, as the entire West Regional, led by top-seeded Syracuse and second-seeded Kansas State will be outfitted head-to-toe by the brand. With 51 teams wearing some form of apparel or footwear from Nike, 45 of those will be outfitted with both footwear and uniforms. A year ago, Nike placed three teams in the Final Four in Detroit, while having a hand in all four participants, including eventual National Champion, North Carolina, which was outfitted by Jordan. Adidas will be the second-most prominent brand in this year’s event, with 11 teams being completely outfitted in the brands products, including five teams in the South Regional alone, topped by third-seeded Baylor, along with the Bears’ Big 12 brethren and fifth-seeded Texas A&M. Adidas also sports three teams in the East Regional, including fourth and fifth-seeded Wisconsin and Temple. Other brands represented in this year’s field include; Russell Athletic (three teams), Under Armour (one team), CRONS (one team), and Pro Look Sports (one team). Two brands, Converse and Reebok had one team each in the 2009 tournament, but are not represented in this year’s field. <>


Sport Supply to Be Acquired by ONCAP Sport Supply Group, Inc. has entered into a definitive merger agreement to be acquired by an affiliate of ONCAP Management Partners, L.P., the mid-market private equity business of Onex Corporation. Under the terms of the merger agreement, all of the outstanding shares of Sport Supply, other than those held by certain participating stockholders, will be acquired for $13.55 per share in cash. CBT Holdings, LLC, an affiliate of Andell Holdings, which beneficially owns approximately 16% of Sport Supply Group's outstanding common stock, and certain members of Sport Supply Group's management team, have entered into agreements with ONCAP to exchange their Sport Supply Group common stock and options, as applicable, for equity of the purchaser entity. Carlson Capital, L.P., which beneficially owns approximately 22% of Sport Supply Group's outstanding common stock, and CBT, have each entered into a voting agreement with ONCAP, and have each agreed to vote their shares in favor of the adoption of the merger agreement.  <> hires exec to relaunch Canadian retail site -, which recently unveiled a new design for its Canadian e-commerce site, has named Tim McMahon vice president of sales and general manager for Canada. He will be based in Toronto and will head the company’s brand strategy and development, web site traffic growth, and advertising and vendor relationship divisions for the company's Canadian business. Most recently, McMahon was vice president and general manager for ypOne Publishing, a provider of yellow pages shopping directories in the United States and Canada. Before ypOne, McMahon worked in sales development for Xerox, Ingram Micro and CDW. recently re-launched its Canadian shopping web site with the new design. will also sell through eBay Canada. "Tim's hire demonstrates our commitment to enhancing our offerings in Canada," says Neel Grover, CEO and president. "His extensive experience in the technology sector is a significant asset to our Canadian operations." <>


Limited Brands to issue special dividend; Approves $200m Share Buyback Program - Shares of Limited Brands Inc. rose Monday evening after the apparel and accessories retailer said it will pay a special dividend next month. Limited shares rose 4.1% to $24.67 in low volume. The company, whose stores include Victoria's Secret, New York & Co. and Abercrombie & Fitch, said its board has approved a special dividend of $1 a share. The dividend will be paid on April 19 to shareholders of record as of April 5. Limited also said its board approved a new $200 million share buyback program, including $31 million remaining under its previous repurchase plan. <>


Mauboussin Opens in Bloomingdale's - On the heels of a high-profile ad campaign, the French jeweler on Monday opened a boutique inside Bloomingdale’s in Chestnut Hill, a suburb of Boston, and is seeking more doors for wholesaling and retailing. For Bloomingdale’s, it’s a head start offering a brand currently without any wholesale distribution in the U.S., and with only one retail site, the four-level Mauboussin flagship opened October 2008 at 714 Madison Ave. in New York with an all-white bridal gallery and the François Chocolate Bar by pastry chef François Payard. Bloomingdale’s has been evolving its jewelry business, growing with firms such as David Yurman, John Hardy and Roberta Coin, since it took over its Finlay leased operation last year. The 450-square-foot Mauboussin shop inside Bloomingdale’s Chestnut Hill is leased and sells the semiprecious stone collection, bridal pieces and Swiss-made watches, with prices ranging from $875 to $20,000.  <>


Nicole Farhi Sold to OpenGate - Nicole Farhi’s new owners have big plans for the British brand, including internationally. On Monday, OpenGate Capital, a Los Angeles-based private equity firm, said it had acquired the company — including its inventory, retail locations and intellectual property — for 5 million pounds, or $7.5 million at current exchange rates, from French Connection Group Plc. News of the deal was first reported on on Sunday. Designer Nicole Farhi will remain creative director of the label and Nicki Scordi, managing director of Nicole Farhi, has been named chief executive officer. Scordi said Monday that during the next 90 days as the deal is completed, management will discuss “growing the business internationally.” “We want to be as present internationally as in the U.K.,” said Scordi. “Having a U.S.-based owner really adds to our ability to grow there.” OpenGate said it plans to grow Farhi’s retail presence in cities such as Paris, Hong Kong, Tokyo and New York. French Connection said Monday that Farhi had an operating loss of 5.6 million pounds, or $8.8 million, in the year to Jan. 31 on sales of 21.7 million pounds, or $34.3 million. Dollar figures have been calculated at average exchange rates for the period.  <>


AAFA Execs Seek Clear Direction on Trade - Apparel companies are concerned about President Obama’s trade agenda, seeking clarity so they can best strategize their sourcing plans. Executives attending the American Apparel & Footwear Association’s annual executive summit here last week pressed U.S. Trade Representative Ron Kirk about trade policy. “Our top concern is trade,” said Wesley Card, chief executive officer of Jones Apparel Group Inc. “We’d like to hear that there is going to be a consistent commitment to free trade.” In the first year of the administration, there was no clear movement on trade, said Rick Helfenbein, president of Luen Thai USA. Consumers in the U.S. “tend to think trade equals loss of jobs, but we need a vibrant trade policy,” Helfenbein said. Companies are faced with a difficult and complex trade environment, said John Strasburger, vice president of sourcing for VF Americas Sourcing. The proposed Trans-Pacific Partnership in particular will help companies globally, he said. “This is an industry that gets it — trade is critical to your lifestyles and you deliver a huge value proposition to American consumers,” Kirk told WWD. Kirk’s remarks at the summit marked the second time this year he has addressed industry executives, and earlier this month he visited a Glen Raven textile plant in South Carolina.  <>


China’s Economic Growth Momentum Has Peaked, Li & Fung Says - China’s growth momentum has peaked as orders and production expand at a slower pace, according to Hong Kong-based Li & Fung Ltd, the world’s biggest outsourcer for retailers. “It is now clear that China’s economy has been moderating,” Li & Fung, which sources products from mainland China, said in an e-mail today. The comment was in a report from the company’s research center, assessing manufacturing data. The world is counting on China, the third-biggest economy, to be an engine of growth as unemployment restrains the recovery in the U.S. and Europe grapples with the Greek debt crisis. Chinese officials assessing when to end stimulus measures are balancing asset-bubble and inflation risks against concern that a “double dip” global slump remains possible. <>


The Macau Metro Monitor, March 16th, 2010


In his Policy Address, Macau CEO Fernando Chui Sai-on did not announce any cap on the numbers of tables, slot-machines or casinos. The government also reaffirmed its intention to raise the minimum age to 21 for entering in casinos, but gave no date for the introduction of the measure. As expected, Chui believed Macau should diversify its economy and support the growth of its MICE (Meeting, incentive, convention and exhibtion) business. He stressed regional cooperation among Guangdong, Hong Kong, and Taiwan. Chui reaffirmed the government’s target of creating more public housing by building 19,000 units and stressed the importance of the construction of public infrastructures like the new hospital in Cotai and the light railway system. Chui did not say anything about wage increases.


"Apart from those we have agreed in principle in the past, in construction and those already approved, we will regulate (approval of the building of new casinos) in the future," Chui said at a news conference on Tuesday. Chui also said the government planned to set up a regulatory body to monitor the growth of the gambling industry.



The Monetary Authority of Macau released data showing a 6.2% increase in new mortgages approved QoQ to MOP 6.6BN . The number of new commercial real estate loans (CRELs) approved dramatically increased by 88% from the previous quarter to MOP6.3BN. The delinquency ratio for RMLs (residential mortgage loans) fell 0.04% to 0.19%, while the delinquency ratio for CRELs dropped 0.10% since end-September 2009 to 0.23%.


The number of visitor arrivals in package tours increased 9.7% YoY to 458,920 in January 2010. Visitors from Mainland China (328,956) rose by 5.1% YoY. Meanwhile, the number of Macau residents traveling outbound in package tours dropped 4.5% year-on-year to 28,471, with mainland China being the most popular destination. At the end of January 2010, the total number of available guest rooms increased by 1,548 (+8.8%) YoY to 19,086 rooms. A total of 664,403 guests checked into hotels and guest-houses in January 2010, up by 26.6% YoY. The average occupancy rate of the hotels and guest-houses soared by 16.0% year YoY to 81.6%.


On the surface the S&P 500 looked like it had a good day, finishing mixed on Monday after spending the bulk of the day in negative territory.  The internals of the market were decidedly negative with volume down 11.6% day-over-day and the advance-decline line turning negative at -506, down 788 on the day.   


The news flow from global MACRO was a headwind yesterday, especially the news from China and Greece.  There were also some concerns surrounding comments from Moody's that both the US and UK have moved "substantially" closer to losing their AAA credit ratings, though note that CDS on US and UK government bonds were little changed.  As we have said many times, the ratings agencies are a lagging indicator. 


On the MACRO calendar in the US, industrial production rose a better-than-expected 0.1% in February, with a positive take away from the ability of production to increase last month despite the weather.  On the negative side, the only real disappointment seemed to be the NAHB Housing Market Index, which fell to 15 in March from 17 in February.


Yesterday, the SAFETY trade outperformed, while pockets of the market with outsized leverage to the RECOVERY trade underperformed today.  Notable decliners included Energy (XLE), Consumer Discretionary (XLY), Materials (XLB) and Industrials (XLI) was flat on the day. 


The bounce in the dollar was the big headwind too, with the move largely fueled by heightened tightening concerns surrounding China; the Dollar index was up 0.52%.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (79.83) and sell Trade (80.79).


Yesterday, there was a lot of noise surrounding the regulatory uncertainty in the financial services and healthcare sectors.  Facilities names and Pharma posted modest gains today; managed care was a laggard with the HMO +0.2%, though the group did finish in positive territory.  There were several reports noting that Democrats currently lack the votes to pass the Senate's healthcare reform bill in the House.


Within Financials (XLF), the banking group was a slight outperformer yesterday with the BKX up 0.2%; however, investment banks along with money-center names were among the laggards yesterday.  The underperformance was attributed to the inclusion of the Volcker Rule in Senator Dodd's financial market reform bill released today.  


After lagging the broader market over the last few weeks, the consumer staples sector was the best performer yesterday.  In the Hedgeye sector models yesterday, outperformance over the immediate term put the XLP in an overbought position, so we shorted it.  Yesterday, WMT was one of the standouts on the back of an upgrade at Citi.  


One of the bigger tailwinds for the market seemed to be the continued pickup in M&A activity, with some high-profile deals yesterday in the apparel and E&P spaces.


Volatility improved 2.39% on Friday, while 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 (17.15) and sell Trade (19.04). 


As we wake up today, equity futures are trading mixed to fair value ahead of today's FOMC rate decision and in the wake of yesterday's performance which saw markets eventually close flat having spent most of the day in the red. The focus of the FOMC meeting will be on any hints as to when the Fed might choose to lift rates.  As we look at today’s set up, the range for the S&P 500 is 22 points or 0.9% (1,139) downside and 1% (1,161) upside.


Today's MACRO highlights will be:

  • US Import Price Index
  • US Housing Starts (February) consensus 570K
  • US Building Permits (February) consensus 601K
  • ABC Consumer Confidence

In early trading, copper is trading higher as the dollar is trading lower.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.24) and Sell Trade (3.45).


According to Bloomberg, gold rose for a second day in London as “investors sought a haven before the U.S. Federal Reserve’s interest rate decision and amid speculation about financial aid to Greece.” The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,094) and Sell Trade (1,122).


Also on Bloomberg today - “Saudi Arabia, the biggest and most influential member of the Organization of Petroleum Exporting Countries, said oil prices are in the right range and there’s no need to change production policy.”  Crude oil is trading slightly higher in early trading.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (78.41) and Sell Trade (82.99).


Howard Penney

Managing Director














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Blaze Of Perceived Glory

“I don’t know where I’m going

Only God knows where I’ve been”

-Jon Bon Jovi


While I doubt the 48-year-old rocker from debt laden New Jersey needs an introduction, it’s worth calling out that the aforementioned lyrics came from Bon Jovi’s #1 single back in 1990, shortly after 1987’s levered up Wall Street crash.


“Blaze of Glory” was also Jon Bon Jovi’s first solo album. Per our friends at Wikipedia, “the album mainly focuses on the theme of redemption and whether an individual's past wrongs will catch up with them.” How appropriate a metaphor for Debtor Nations as we tip-toe through the Ides of March 2010.


With short term stock market moves cheering them on around the world this morning, politicians from Greece to California will be headlining the Manic Media’s show again today. These are the wanna-be-rockers of their own political  futures. These are the high priests of all that beneficed this leverage crisis. These are the willfully blind saviors of reform.


Maybe the only thing worse than 545 people in US Congress deciding our children’s economic fate is piling 27 Finance Ministers from the European Union into rooms in Brussels to do the same. European stock markets are trading higher across the board this morning after Luxembourg’s Prime Minister Jean-Claude Juncker proclaimed Europe’s mystery of faith:


“We clarified the technical arrangements that would enable us to take coordinated action which could be swiftly put into place in the event it is necessary…”


Then like a phoenix rising from the ashes of a construction project in Qatar, the Central Bank Governor of the United Arab Emirates Sultan bin Nassar al-Suwaidi proclaimed this about Dubai World’s $26 Billion in debt and whether they’ll be needing a bailout:


““They haven’t discussed this issue with us and I don’t think it will be necessary…”




Each night I go to bed

I pray the Lord my soul to keep

No, I ain’t looking for forgiveness

But before I’m six feet deep”


Yeah! Hit it! “Take us now, but know the truth.”


With consensus clamoring to call China bubbles, the last of the global bubbles that remains is that in global politics and the Piling of debt, Upon Debt, Upon Debt. Knowingly or not, these politicians are going to take us down with a “Blaze of Glory”.


According to Dealogic, sovereign bond issuance in developing markets is currently amassed to $129 Billion in 2010 to-date. Never mind 2009 being the prior record in Global Debt Piled Upon Debt folks. This level of debt issuance is already running up +42%  year-over-year versus that.




Greece has another $20 Billion Euros that they’ll need to raise by May. So this debt issuance party is just getting started. Just this morning, The Financial Times is reporting from the Brussels meetings that these 27 Euro dudes seem to be contemplating another $25B Euro credit facility out of thin air to make sure the volume at this Greek leverage party stays right jacked up.




All the while, the Chinese are selling Treasury debt to the masses of people who are punch drunk at this global debt rock concert. Just plow it into whoever’s 401k that will take it as the Chinese sell it right back down our Congressional wind pipe.

China selling? Oh, no – they’d never do that, would they? I’ve said this enough times to be as annoying as Chris Dodd telling you he has it figured out this time, but please, for the sake of sobriety – please watch what the Chinese do versus what they say.


China was a net seller of US Treasuries for the 3rd consecutive month in January, selling another $5.8B net and taking its balance of America’s debt holdings down to $889 Billion.


That’s another $889 Billion reasons to ignore the reality that you can just “take me now but know the truth.” If we anger The Client (China) enough, rates are going a lot higher than your “exceptional and extended” Congressman’s sense of self is telling you.


“Call me a young gun” if you will, but I am telling you that this “boy will be happy to die like a man” taking a stand on sovereign debt, as those addicted to leverage go down in their Blaze of Perceived Glory.


We’ll be hosting a conference call on Sovereign Debt on Friday. Please email if you’d like to listen in. My immediate term support and resistance lines for the SP500 are now 1139 and 1161, respectively.


Best of luck out there today,






USO – United States Oil — Despite a sharp correction in oil prices on 3/15/10, the price of WTIC oil remains in a bullish intermediate term position with TREND line support at $77.39/barrel. Buying on red.  


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.



XLP – SPDR Consumer StaplesConsumer Staples was the best performing sector on 3/15/10 in our S&P Sector Model and was immediate term overbought.


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 Macro Mixer: A Notable Divergence

In the first two weeks of March the S&P 500 has rose +4%.  Given this, many are waking up today to feeling that all recent short ideas are really bad and all recent long ideas are really great. 


Last week the dollar was down 0.74% and stocks were up 0.99%.  That makes some sense, but none of the sectors most leveraged to the REFLATION trade outperformed the S&P 500.  What may not make sense was that commodities were down last week.  The CRB index was down 1.1%, gold was down 2.9% and copper was down 1.1%.  So the scenario of stocks up, dollar down, and commodities down presented an interesting divergence.


The question we asked ourselves during our morning meeting was, “Are commodities, and gold in particular, anticipating an interest rate hike?” 


In the face of bond yields going up, commodities –gold and copper especially - went down.   As we have expounded upon at length, we believe the fed’s departure from the language of “extended and exceptional” will push yields up.  As the cost of capital goes higher, it is implied that the prices of the most speculative commodities come under pressure. 


Coming into this week, our Hedgeye models are running bullish with 9 of 9 sectors positive on TRADE and 8 of 9 sectors positive on TREND.  On Friday, the sector study was bearish with 5 of 9 sectors declining on the day.  The one sector that is not positive on intermediate term TREND is Utilities (XLU).  We see issues with XLU; gold and commodities going down are a signal the interest rates are going up.  XLU is a surrogate for yield chasers. 


With commodities under pressure and the dollar in a bullish formation - positive on TRADE, TREND and TAIL - it’s not surprising that Materials (XLB) and Energy (XLE) underperformed last week and year-to-date.  


The best performing sectors are the ones most levered to the inventory build in the US economy, the consumer propensity to spend, and the “Piggy Banker Spread”: Consumer Discretionary (XLY), Financials (XLF) and Industrials (XLI). 


We pick our spots carefully, but right now the only sector we are long is Healthcare (XLV).  In the Hedgeye Healthcare First Look Tom Tobin commented that “These are strange days for Health Reform.  This week should spell the end of the process and everyone is expressing confidence that they will be vindicated.  Not everyone can be telling the truth, however.  The Intrade quote started spiking on Friday.  Somebody knows something.” 


With the XLV up on a down day, we are happy to be long! You don’t have to be bullish on the market to be bullish on certain sectors or stocks.


Howard Penney

Managing Director


The Macro Mixer: A Notable Divergence - xlv


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?




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