• run with the bulls

    get your first month

    of hedgeye free


Question: Is China Selling Treasuries?

In the spirit of being transparent about our research process, I have decided to start showing more of the back and forth we have within our exclusive idea generating network. We have some very bright people who are transparent enough to tell us when they disagree with us and why. We are grateful for their trust. Hedgeye’s goal isn’t to be inflexible. It’s simply to be right.



On the topic of China selling Treasuries, this is what I wrote in the Early Look yesterday:


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.



Here was a response and ensuing debate between Hedgeye and a major Fixed Income PM from Massachusetts:


1. It is factually incorrect that they sold...they can buy out of London. Also, they extended out the curve to coupon bearing bonds instead of discount notes. A few months back the TIC data said they sold...but when more info came out, it turns out they were still the biggest net buyer....
most likely same thing happened here.


Hedgeye: Are you suggesting that its factually correct that they didn’t sell?


2. I am suggesting that other reports show they didn't.


Hedgeye: Well it sounds like no one can say, factually, that they didn’t sell – so I am going to go with what I see them doing every day, which is giving America the bird and reducing risk to her compromised financial system.


3. I’ll find where in report and send it to u when I get a chance. It is buried in the TIC data…


Hedgeye: ok, thanks - we looked there and didn’t come to the same conclusion, but this isn’t crystal clear and we may have missed something.


4. Let me revise...it is NOT factually wrong that the Chinese have sold. Net net it appears as though they have, although they could have purchases through UK custodian. there is no way of knowing who is buying all the USTs through UK custodian.

On the other hand, they have net added coupon bonds (us treasuries, as opposed to us bills) to the same tune as they have been buying for a while.

bills expiry > ust treasury buying = net "selling" that is apparent on the report (without being able to adjust for the potential to buy through UK custodian).

hope this helps.


Hedgeye: this is very helpful - thanks for taking the time to flag this. We need to do more work here and we will be back to you with anything incremental.


Keith R. McCullough
Chief Executive Officer



And that was a very ugly “bubble”


Yesterday, it was HOG  and today it’s PLCM…


According to today’s rumor mill, Polycom is in talks with Apax Partners over a deal that could take the company public.


The daily rumor mill is a scary reminder of 2007 and we know how that ended.  Unfortunately, with the FED keeping rates low for an extended period of time, the chance of this getting crazier before it’s over is very high.  Here is what we have so far – PLCM, HOG, HUN, RSH, WHR and GME are all stocks that have been in the rumor mill about some sort of buyout speculation. 


In the restaurant space, both Benihana and CKE Restaurants have recently announced bids on the table.  Adding to the “noise,” the New York Post reported last week that Nelson Peltz was considering a counter bid for CKR. 


The following is a list of restaurant companies that could be on the A list for a private equity transaction and/or for becoming victim of the rumor mill:




In compiling this list, we are trying to avoid waking up one day to a “potential” short up 10% on “buyout” rumors.  While it may be easy to take issue with the fundamentals or potential valuation of any of these names, what you can’t deny is that all of these companies have very little funded leverage and generate substantial free cash flow. 


Howard Penney

Managing Director


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.



Attention Students...

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

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


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

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.