He Who Sees No Inflation

If this chart weren’t so sad, it might be funny. The Federal Reserve’s track record in proactively predicting inflation isn’t funny. It’s embarrassing.


Never mind Bernanke suggesting we had no inflation with oil at $150/barrel in 2008, he never saw it coming in 2007 to begin with. In the chart below, we have outlined the headline producer price index (PPI), monthly, going back 3 years.


I know, I know. Some of Washington’s finest revisionist historians don’t use the headline numbers. They apparently are in the business of taking the government’s word for it on what is “core.” That’s actually funny.


This morning’s PPI report came in at +4.4% year-over-year growth. Even if you do trust the government’s calculation, that’s inflationary.


Since government hired economists are in the business of commenting on Made-off numbers, here are some thoughts on Made-up the numbers:

  1. If you want to exclude things like meat and eggs (heck, maybe you don’t eat these things), then producer prices were lower (eggs prices were +8.5% y/y and meat was +4% y/y).
  2. If you want to exclude gasoline (heck, maybe your businesses margins don’t include gasoline), then producer prices were higher (gasoline was down -7.4%).
  3. If you want to look at a price chart of oil or gasoline since the February lows, you can do that too – that’s going to look inflationary

Today’s report was based on February prices. Prices in March (again, depending on what’s relevant to your profession) are, by and large, a lot higher than where they were in February. Heck, stock prices alone are up +10.2% since February 8th; maybe we should ask people who are in the business of producing returns on the short side if we should include that in the PPI calculation!


The chart below doesn’t lie; politicians lie about inflation. If you want to tell me that inflation slowed sequentially by 20 basis points y/y versus the January inflation report of +4.6% year-over-year price growth, I will agree with you. I’ll also ask you whether you agree with me or not that the PPI will re-accelerate sequentially in March. Just don’t ask He Who Sees No Inflation (Ben Bernanke) what he sees. Sadly, that too is proactively predictable.



Keith R. McCullough
Chief Executive Officer


He Who Sees No Inflation - usppi


Sports Apparel Quick Callouts and Deltas

Another good week on the margin, especially for Nike and the Athletic Specialty channel.


  • Industry sales growth continues to improve sequentially for the second week in a row
    • The sequential growth accelerated +440bps vs. last week’s acceleration
  • Sales in the family retailers channel improved meaningfully on a sequential basis, though still down 4% y/y
  • The sporting goods retailers continue to buoy the industry, with YTD sales growth 39% greater than the discount/mass retailers channel and 25%  greater than the family retailers channel
  • NKE dollar sales growth has accelerated for the second straight week, up to 24% y/y
    • For the last five weeks, NKE has been gaining market share at an average +388bps/wk
  • With the looming onset of March Madness, there’s no surprise that basketball apparel sales growth turned positive at +4%y/y after over five weeks of negative growth
Sports Apparel Quick Callouts and Deltas - 1
Sports Apparel Quick Callouts and Deltas - 2
Sports Apparel Quick Callouts and Deltas - 3
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Sports Apparel Quick Callouts and Deltas - 5
Darius Dale


R3: Never Say Never, but...


March 17, 2010
The apparel sector is coming off of the largest boom in import cost reductions we’ve seen in a decade.  As we approach the back half of 2010, better than expected demand at retail so far this Spring along with a growing trend in the pulling forward of orders suggests we may be heading for cost pressures that will come earlier and greater than expected.  
The apparel sector is coming off of the largest boom in import cost reductions we’ve seen in a decade. Anecdotally, companies are beginning to temper opportunities for further cost of goods savings, especially as we approach the back half of 2010. Factor in better than expected demand at retail so far this Spring along with a growing trend in the pulling forward of orders, and it appears we may be heading for cost pressures that will come earlier and greater than expected. Topline acceleration against tougher compares in the back half of the year is less likely, but will be necessary if the sector is able to absorb rising costs without taking a hit to margins. Never say never, but the likelihood of exceeding peak, peak margins is looking slim.
R3: Never Say Never, but... - 1
R3: Never Say Never, but... - 2
R3: Never Say Never, but... - 3
Eric Levine

  • In one of the more creative experiential marketing efforts we’ve seen in a while, IKEA installed some of its sofas in four Paris metro stations. Given that most subway stations are designed with theft and vandalism in mind, we wonder what the state of these IKEA couches will be in just a few days. 
  • Both LL Bean and Land’s End have launched premium lines, both with a more fashion forward bend. The LL Bean signature line is designed by the folks behind boutique preppy brand Rogues Gallery, with a focus on trimmer silhouettes and a younger consumer. The Land’s End CANVAS line evokes the brand’s heritage as classic American. In our view, it looks like J Crew, but is priced more aggressively. 
  • Is the peak in premium denim finally approaching? Perhaps, especially if you want to use pop-culture as a measure. The documentarian behind the hit fashion movie “Unzipped”, just released a four part series online called “Dirty Denim”. The mini-series takes a look into the growth of the California premium denim market, its origins, and the challenges embedded in the industry. The videos reside on Sundance’s Full Frontal Fashion website… 

MORNING NEWS Targets Retailers - First consumers, then business people in general and now there are a slew of new fashion industry-specific Web sites springing up that combine marketplaces with social media. Consumers, designers and retailers have embraced e-commerce, Facebook and Twitter, yet most in the industry are still using outdated tools to perform their jobs. For example, buyers still generally rely on pencil and paper to write orders., created by retail and fashion executives, is a wholesale online community for brands and stores to increase buying efficiencies, with a social media component as well. The site is targeting high-end labels and retailers, with Barneys New York and Showroom Seven participating in the test phase. BrandOrders will go live in the spring, with 75 brands from Prêt à Porter, a trade show in Paris, and its New York show, The Train/The Box. Lilla P, Pure Amici, Real Truth, Lauren Balgiore and Tiia Vanhatapio are among the site’s apparel vendors, while Lockhart, Jennifer Elizabeth, Abas, Pono and Lexi Lu represent accessories and jewelry resources, said Lincoln Brown, BrandOrders’ chairman. Brown, a venture capitalist whose Next Generation Ventures invests in fledgling firms, is funding BrandOrders founder and chief executive officer Chris Guerra got the idea for the site after accompanying his mother to trade shows and buying trips for Bamboo Clothiers, the stores he and his parents own in South Florida. “When we got home, I watched mom piece together orders with carbon paper all over the place,” said Guerra. “She wrote orders and faxed them in. This [site] eases some of the pain of the wholesale buying process.” <
MLB partners with Victoria's Secret to take swing at female fans - Women make up nearly half of Major League Baseball's fans. MLB is partnering with Victoria's Secret's PINK brand to take aim at young women during the 2010 season with a new fashion line featuring the logos of 11 clubs, including the New York Yankees, Boston Red Sox, St. Louis Cardinals, Chicago Cubs, Minnesota Twins and Los Angeles Angels. The VS PINK brand caters to college-age women with bras, lingerie and sleepwear. The baseball-themed line of crystallized hats, jerseys, T-shirts, hoodies, sweatpants, tanks, shorts and fleeces will roll out in more than 100 Victoria's Secret stores in 11 markets Tuesday. It will also be sold online at The youthful gear will feature sayings such as "I Only Kiss Angels Fans" and "Love Love Love Twins." Prices will range from $19.99 for caps to $58 for fleeces. Some MLB ballplayers will appear alongside Victoria's Secret models as they tout the line in the 11 markets. Women account for more than 40% of fans at major league games, MLB executive vice president Tim Brosnan says. He's hoping fashion models will wear the gear at the annual Victoria's Secret fashion show. "After we do the 11 teams, there will then be demand for all 30," he says. <>
Karl Lagerfeld Brand to Remain With Apax - Karl Lagerfeld soon may be courting new suitors. Karl Lagerfeld SAS, a wholly owned subsidiary of Tommy Hilfiger Group since 2005, is not part of Phillips-Van Heusen’s $3 billion acquisition of Hilfiger’s company. Lagerfeld’s business will be retained by Apax Partners, the private equity firm that owned Hilfiger, according to Christian Stahl, partner in Apax. “We didn’t sell it along with the business,” Stahl said. “We’re going to take it out at the closing and put it into a separate company that we’ll continue to own. We believe it’s one of the best designer brands in the world, and we will put new management in place.” Stahl said a new management team hasn’t been appointed. “It’s not commercially the best brand in the world, but in terms of appeal and recognition, I think it’s a great brand. We’re going to focus on it and develop it,” he said. Asked if Apax will try to eventually sell the business, Stahl replied: “Every company we own is for sale.”  <>
Pay Central Issue as Polo Trial Begins - Polo Ralph Lauren Corp.’s attorney vigorously rebutted charges the company should have paid California employees for time spent waiting for routine antitheft security checks at the end of their workdays as a class-action lawsuit trial began Tuesday in U.S. District Court here. Instances of unpaid overtime and miscalculation of commissions are also being alleged in the lawsuit, which is seeking $17 million in back wages and penalties. The case involves 6,700 people employed at Polo full-line and outlet stores in the state between May 2002 and January 2009. In opening arguments, Polo’s attorney William Goines told the six-person jury that claims of waits up to 15 minutes for security checks are exaggerated, and those involving unpaid overtime and commissions are incorrect. He also questioned the validity of conclusions drawn from a survey undertaken on behalf of the plaintiffs, as well as the survey size — only 300 of 1,600 questionnaires were completed. <>
Inflation vs. Deflation: As Economy Improves, Price Pressures Grow - If the economic recovery stays on track, the fashion world just might have to adjust to something it hasn’t seen in almost two decades: inflation. The upward swing in prices would mark a stark turnaround from the steady slide in costs that has been the industry norm as retailers and suppliers found ever-less-expensive sources of supply. But with wage pressures rising in China, raw materials prices climbing and demand beginning to recover worldwide from both consumers and manufacturers, there is a growing sense deflationary pressures could be easing and its opposite might begin to take hold. Retail executives, at least, see that as a hopeful sign. “Deflation for the last decade-plus has not been particularly helpful for retailers,” said Myron E. “Mike” Ullman 3rd, chairman and chief executive officer of J.C. Penney Co. Inc. and a board member of the Federal Reserve Bank of Dallas. “A little bit of inflation wouldn’t be a bad thing for retailers as businesses, but obviously, too much inflation isn’t good.” Ullman noted asset values also go up with prices, providing a bit of a silver lining. With the economy still finding its footing, prices are generally expected to hold steady this year. “With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time,” the Federal Reserve Board said Tuesday. <

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The Macau Metro Monitor, March 17th, 2010



Macau's CEO Chui wants casino operators to solidify development plans on government-granted land--or risk losing it. Chui said, "The government will follow legal procedures... The whole process will be made very transparent, but the land has to be taken back and some of it will be used for social housing." Chui had mentioned a plan to build 19,000 public-housing apartments by the end of 2012. The warning from Chui reinforces concerns over construction delays in Macau and discounts the notion that casino operators will receive favorable treatment. Also, his words may be directed towards Sands China, which despite building some of Macau's largest properties, still has a number of vacant sites in Cotai. Another stalled project, called Macau Studio City just south of Sands China's massive Venetian Macao resort, has been bogged down in legal disputes for over a year.



Chui did not go into extensive details on how the government will regulate the size and growth rate of Macau's gaming industry. Chui reaffirmed the intention to outlaw slot-machine parlors in residential areas, saying existing venues will have to move. Meanwhile, starting at the end of this year, the government will conduct an audit of gaming operators, to evaluate their compliance with basic internal control procedures.


According to the South China Morning Post, interest in Macau real estate is picking up as Hong Kong property agents  such as Midland Realty and Centaline Property Agency plan to increase their presence in Macau by adding branches and staff. A newcomer, Hong Kong Property, plans to invest HK$5MM in its Macau expansion. Experts believe the resumption of Las Vegas Sands construction projects on the Cotai Strip along with the Hong Kong-Zhuhai-Macau bridge will help to stimulate the market. Stanley Poon, managing director of the Centaline Property’s Macau office, expects home prices to grow 15% in 2010.

US STRATEGY – Gaining Traction

The S&P 500 turned an exceptionally strong performance on Tuesday, finishing around its best level for the day.  Volume was up 9% day-over-day and breadth expanded significantly.  As the market is getting stronger there is seemingly a pickup in the appetite for increased risk.  The dollar index has now fallen 4 of the last 5 days and was down 0.62% yesterday.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (79.68) and sell Trade (80.86).


Yesterday’s FOMC meeting was anticlimactic.  The central bank reiterated that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  See Keith’s post from yesterday “FOMC Pandering: Trader Vik like it” for our position on this subject.  


Again the MACRO data points provide some headwind, but are being brushed under the rug.  Yesterday, housing starts in the US fell 5.9% month-to-month in February, but the decline was due mostly to weather related issues.  Although the news from the Euro zone is slightly more positive as the finance ministers said that they are ready to help Greece with an emergency support facility, if needed.  There also seems to be very little concern about the potential for an “angry client” - see yesterday’s Early Look for more details.   


Last night China rose for the second day in a row, rising 1.93% - the second biggest day of 2010! The Chinese crash callers are everywhere, as we believe that the widely expected additional tightening measures are already priced into the market.  We are long China through the CAF.


On the back of a weaker dollar and a better performing Chinese market the two best performing sectors yesterday were Materials (XLB) and Industrials (XLI).  The Fertilizer names were underpinned by upbeat inventory data, while NEM, WY and X all outperformed.  CF industries was the only stock to decline in the XLB yesterday.


While consumer stocks lagged the broader market today, LBO speculation runs rampant and is reminiscent of 2007.  Yesterday speculation was that HOG would go private; the stock traded up 7% on big volume. 


Volatility declined 1.72% yesterday, 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 (17.16) and sell Trade (18.79). 


As we wake up today, Equity futures are trading above fair value in a continuation of yesterday's upward momentum and firmer global markets.  As we look at today’s set up the range for the S&P 500 is 19 points or 0.6% (1,144) downside and 1.1% (1,163) upside.


Today's MACRO highlights will be:

  • MBA Mortgage Applications came in at -1.9% (it was the weather of course)
  • Feb PPI (up 4.9% YoY)
  • DOE Crude Oil, Natural Gas Inventories

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 (3.43).


In early trading Gold is also benefiting from a lower dollar.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,108) and Sell Trade (1,140).


OPEC agreed for the fifth time since 2008 to keep its production limits unchanged, even as some members voiced concern that supply may be too high.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (79.90) and Sell Trade (83.10).


Howard Penney

Managing Director


US STRATEGY – Gaining Traction - sp1


US STRATEGY – Gaining Traction - usd2


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US STRATEGY – Gaining Traction - copper6


The Seeds of Manipulation

When people learn no tools of judgment and merely follow their hopes, the seeds of political manipulation are sown.”

-Stephen Jay Gould


Modern day science lost an important mind when Stephen Jay Gould passed away in 2002. He was only 60 years old, but had already contributed a great deal of biological research on the evolution of man. Many of Gould’s research essays were collected in volumes with titles like “Ever Since Darwin.” He developed the theory of “punctuated equilibrium”, where evolutionary change occurs much more rapidly than during longer periods of stability.


I wake up every morning with a hope that our financial leadership and thought processes about markets and risk evolve. Hope, unfortunately, is not an investment process, and I often find myself getting frustrated. Sometimes it’s pretty obvious in my writings; I get that.


But do politicians around this world get it? Let’s consider this morning’s global macro news run:

  1. “I wish there was a miracle, but all we can do is persist with our efforts.” –Bank of Japan Governor Masaaki Shirakawa
  2. “All we can do on the Monetary Policy Committee is stand ready to react” –Bank of England Deputy Governor Charles Bean
  3. “The only way we will change them is by forcing them to change” –Senior United States Senator (NY) Chuck Schumer on China

Collectively, I don’t even know how to start summarizing these statements. This is getting bad. The Bubble in Global Politics seemingly has no peak in sight. We are all hostage to the Seeds of Political Manipulation.


Setting aside how ridiculous Schumer’s comments about America’s Creditor (China) are, let’s consider where these comments from Japan and the UK are coming from this morning.

  1. In Japan, the BOJ left interest rates unchanged at ZERO percent for the umpteenth time in the last few decades (really successful economic policy model for America to follow by the way – who needs to evolve and learn from that?) and implemented a fresh 20 TRILLION Yen, 3-month loan facility, to inject more liquidity into their politically compromised bureaucratic bubble economy.
  2. In the UK, with Gordon Brown leaning as far left as he can possibly bend in order to save his political career, monetary policy politicians are trying to reconcile why this thing called inflation has reared its ugly head into their compromised government inflation reporting system. Inflation in the UK is running up +3.5% all of a sudden. That’s well above their stated target. That’s what happens when you burn the value of your currency.

Again, I can’t go on the record addressing these China comments from Schumer. I just deleted what I wrote about them. I cannot get my head around them in anything that resembles a professional way. Back to Japan and the UK:

  1. What is 20 TRILLION Yen going for these days anyway?
  2. In the UK, are they admitting what American monetary policy makers wouldn’t dare? That setting policy is a reactive exercise?

We regularly beat this point to a dead pulp, but real people in this world are coming up with real proactive plans to prevent crises. Meanwhile, we have mathematically and scientifically incompetent politicians around this word sowing the seeds of their own mindless market manipulation, then reacting to what they themselves planted?


Now I have a headache.


Back to the math, twenty TRILLION Yen equals $222 BILLION Dollars. Oil is trading up at $83/barrel and copper at $3.40/lb this morning. Western and Japanese governments are creating more money than God himself could count.


Printing moneys for an “extended and exceptional” period of time will end with inflation that politicians will be reacting to and “wishing for a miracle” that the rest of us who aren’t paid to be willfully blind don’t see.


Sorry China. That’s all we can say this morning about Schumer’s comments. Sorry. He’s just another American politician who “has learned no tools of judgment” who is “merely following his own political hopes.” Please don’t sell your Treasuries. Please.


My immediate term support and resistance lines for the SP500 are now 1144 and 1163, respectively. I have 17 longs and 8 shorts in the Virtual Portfolio, and if the market is up today on these hopes of globally socialized losses, I intend on selling into them.


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.