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Good news is good; bad news is taken with a grain of salt.


Yesterday, Starbucks was upgraded to buy from neutral on a “sales and profit momentum” call that will not end.  At 10x NTM EV/EBITDA, SBUX is looking expensive but fundamentals are strong.  I agree with the “call” behind the upgrade, but think the analyst is just a little late to the party.


Sonic was also upgraded to overweight from underweight; Cheesecake Factory downgraded to underweight from neutral and Brinker downgraded to underweight from neutral. 


Yesterday’s score care looks this:


  • SBUX up 3.6% on a 125% increase in its 30-day average volume
  • SONC up 5.6% on a 274% increase in its 30-day average volume
  • EAT down only 0.5% on a decline of 11% in its 30-day average volume
  • CAKE down only 0.1% on a 27% increase in its 30-day average volume


Today, JACK was upgraded to buy from neutral and the stock is currently trading up 5.6% on strong volume.


I can’t comment on the legitimacy of the analysts who are making these “calls”.  What seems obvious is that there are no willing sellers on “bad” news, but the buyers show up on good news.  The current economic environment is having an outsized impact on QSR over FSR and that is now clear to everyone.


What is uncertain is when that tide will change.  The most obvious signal will be when the Casual Dining industry believes that the economic climate is strong enough for the major industry players to start growing units again.



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
Sports Apparel Quick Callouts and Deltas - 4
Sports Apparel Quick Callouts and Deltas - 5
Darius Dale


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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… 

BrandOrders.com 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. BrandOrders.com, 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.com. 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.” <wwd.com
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 VictoriasSecret.com. 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. <usatoday.com>
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.”  <wwd.com>
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. <wwd.com>
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. <wwd.com


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.


CHIEF SHORT ON DETAIL macaubusiness.com

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


US STRATEGY – Gaining Traction - vix3


US STRATEGY – Gaining Traction - oil4


US STRATEGY – Gaining Traction - gold5


US STRATEGY – Gaining Traction - copper6


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