R3: No Go for Affordable Footwear Act


March 18, 2010


Potential call option for low-cost footwear retailers has officially lost support in Washington – no longer viable. This benefit was not in our models, and likely anyone’s expectations. But for those who were hoping…forget it.





It’s official, the Affordable Footwear Act will not be supported by the Obama Administration. The bill designed to eliminate import taxes on footwear has been put on ice again according to a U.S. Trade Representative last week removing a potential tailwind for the footwear supply chain and low-cost footwear retailers.


In a post last spring we provided an update on the bill, which resurfaced after efforts for its passage were thwarted in 2007. Originally designed to protect the domestic footwear manufacturing sector in the 1930s, the tax is now obsolete with imports accounting for 99% of all shoes sold in the U.S. In 2008, the government collected over $1.7B in duties on imported shoes. This bill would have eliminated nearly $800mm in duties by removing the tariffs on all children's footwear as well as lower cost shoes with fabric uppers. As we highlighted, this would have been an added kicker to top beneficiary Payless (in the chart below) and completely incremental – that call option no longer exists.


Resistance from the Administration lay in the fact that China, while not explicitly highlighted, would be the greatest benefactor of the legislation pocketing more than 75% of the tariff reductions. While that is indeed the case, let’s not forget that less than 1% of footwear is produced domestically and it’s not of the low-cost kind. The spirit of the bill was not intended to effect employment, which it wouldn’t, but rather support price deflation for those who would benefit most – America’s working-class. This is a classic example of an example of where addition by subtraction just does not apply.


R3: No Go for Affordable Footwear Act - AFA 3 10


Casey Flavin




  • In a rare commentary about a specific customer, Nike management endorsed the changes underway at Foot Locker. Nike is excited about Foot Locker’s efforts to differentiate and segment its stores as well as the opportunity to grow their running business. There were also positive comments about the re-emergence of growth in House of Hoops. Judging by the commentary on the running category as it pertains to Foot Locker, it sounds to me like the folks from Beaverton may have already paid a visit to the new running shop in Union Square, NYC. 
  • At a conference, Kroger management noted that if they could redo 2009 they would have been less promotional and aggressive in reducing prices in the first quarter of last year. Instead, they would ratably layered in pricing changes over the course of the year. By taking prices down at the beginning of the year, they believe they ultimately limited their flexibility in being able to react to the competitive pricing environment without it damaging the bottom line. 
  • According to the 11th Annual Online Fraud Report, ecommerce losses related to fraud posted their first drop since 2003. The reduction of 17.5% vs. 2008 equates to about $3.3 billion lost due to fraud last year. Online retailers further predict their loss rate will about 1.2% in 2010, vs. 1.4% over the past 3 years. The improvement is largely the result of improved technology and use of fraud detection processes that are now in use across the industry. 




Independent-minded Plans to Make "Big Push" into Apparel - It’s been five months since the world’s biggest online retailer officially acquired the largest online shoe store and so far the marriage between Inc. and Inc. is working well, Zappos CEO Tony Hsieh says in a new blog posting. With a bigger parent and deeper resources, Zappos was able to increase its gross merchandise sales by 18.8% to $1.20 billion in 2009 from $1.01 billion in 2008, says Hsieh. “Amazon has continued to allow us to run Zappos independently with our own unique culture, brand and way of doing business,” Hsieh says. “From our point of view, it's been as if we swapped out our previous board of directors with a new one, but we now have access to a lot more resources so we can continue to build the Zappos business even faster. Over the past few months we've actually seen our growth rate accelerate compared to the prior year.” With Amazon’s backing, Zappos will continue to expand further into apparel and other product categories, says Hsieh. “We're making a big push into apparel, which is four times the size of the footwear market, as well as other product categories including bags, accessories, and housewares,” says Hsieh. “We think we’re just at the tip of the iceberg of what's possible as we continue to build the Zappos brand.” began diversifying into other merchandising categories in 2008 when it acquired footwear and accessories site from for an undisclosed price. <>


Wal-Mart Considers Selling Yuan Bonds in Hong Kong - Wal-Mart Stores Inc., the world’s largest retailer, is considering selling yuan bonds in Hong Kong as China opens its markets, according to Asia Chief Executive Officer Scott Price. The company is “considering options” that may include yuan-denominated debt, Price said in an interview at Wal-Mart’s Asia offices in Hong Kong yesterday. Such a move would underscore the company’s commitment to support local communities and China’s financial system, he said. “Wal-Mart is in Asia and in China for the long term,” Price said. The company wants “the Chinese people to know that we see a responsibility to help build their economy,” he said. China is expanding its financial system, and will use Hong Kong as a testing ground for yuan products, according to the city’s former central bank chiefJoseph Yam. Foreign companies in February became eligible to issue yuan bonds as part of efforts to bolster the ex-British colony’s financial status and expand its role in promoting the yuan for commerce. The company has $38 billion of outstanding debt and more than $5 billion of bonds maturing by the end of 2011, according to data compiled by Bloomberg. The Bentonville, Arkansas-based retailer could be the first foreign non-financial company to issue yuan debt in Hong Kong. <>


Steve Murray Leaving Vans for Urban Outfitters - Urban Outfitters, Inc. announced that Tedford Marlow, president, Urban Outfitters Brand, will retire and be succeeded by Steve Murray on April 12, 2010. Murray has been president, VF Action Sports Coalition since February 2009 overseeing the Vans and Reef brands. Murray, 49, will join the company on April 12, 2010 from VF Corporation.  Prior to assuming the role of President, VF Action Sports Coalition, Murray was president of VF's Vans brand from 2004 to 2009. Murray had been the Chief Marketing Officer for Vans, Inc. from 2002 to 2004 and Senior Vice President, International from 1998 to 2002. Prior to joining Vans, Inc., Mr. Murray held various leadership roles in the US and abroad for Reebok International, LTD from 1991 to 1998. Murray holds a BA in Business Studies from Middlesex University.  <>


Della Valle Boosts Stake in Saks Again - Diego Della Valle is voting with his wallet that there’s more upside potential in Saks Inc. By spending an additional $30.2 million since March 10, Della Valle has boosted his stake in the luxury retailer to 9.4 percent from 7.1 percent. While the investment is significant, Saks has proven to be a lucrative deal for Della Valle: He has already made a profit of more than $44.5 million on the shares he has snapped up since last year. The chairman and chief executive officer of Italy’s Tod’s SpA, through his personal investment vehicle Diego Della Valle & C. S.A.P.A., has purchased an additional 3.62 million shares of Saks’ stock. The latest purchases, made between March 11 and 16, were for an average of $8.33 a share and boosted his holdings to 15 million shares, according to a Schedule 13D filed with the Securities and Exchange Commission Wednesday. Shares of Saks closed up 1 cent, or 0.1 percent, at $8.49 Wednesday, valuing Della Valle’s stake at just less than $127.4 million. The closing price translates into a profit of $4.92 a share on those shares Della Valle bought in 2009, or a total of about $41.7 million. It also adds up to nearly $2.9 million in profits for the additional stock he acquired this month. <>


Inditex Profits Rise 17.8 Percent - Inditex SA, Europe’s largest clothing retailer and owner of the Zara brand, is bullish about its prospects after reporting a 17.8 percent spike in fourth-quarter 2009 profits. Unveiling the results Wednesday, which beat analysts’ estimates, the company also said its store sales are off to a good start this year. Net profits in the three months ended Jan. 31 were 483 million euros, or $704.9 million, on sales of 3.32 billion euros, or $4.84 billion, which advanced 8.9 percent. Dollar figures are calculated at current exchange rates for the period. For the full fiscal year, Artiexo, Spain-based Inditex’s net profits gained 5 percent to 1.31 billion euros, or $1.84 billion, on sales that rose 7 percent to 11.08 billion euros, or $15.55 billion. Pablo Isla, Inditex deputy chairman and chief executive officer, said during a press conference in Madrid Wednesday that “satisfactory” results demonstrated the “global reach of our business model,” which has led to “a widely diversified sales platform.” Isla said “2009 has been a year of increased efficiency and tight operating control [and] as a result, we have generated a strong cash flow, which we have dedicated mainly to the expansion of the business.”  <>


Congress Passes Jobs Bill - The Senate sent a $17.6 billion jobs bill to President Obama on Wednesday that gives tax breaks to businesses that hire workers and invest in new equipment. Apparel industry and retail groups view the bill, which passed 68-29, as a good first step in helping companies. They also are seeking more help from the Obama administration to jump-start the economy and create jobs. The centerpiece of the bill is a $13 billion provision that offers an exemption from Social Security taxes this year to companies that hire new workers who have been unemployed for at least 60 days. Companies would also receive a $1,000 tax credit on their 2011 income tax returns for each new worker that is retained for a full year. Another provision allows small businesses to immediately write off equipment purchases made this year up to $250,000 as business expenses, instead of depreciating those costs over time. President Obama, speaking in the Oval Office, said the legislation was “the first of what I hope will be a series of job packages that help to put people back to work all across America.” The legislation “will provide tax cuts to small businesses that are willing to begin hiring right now, putting people back to work,” Obama said. “It’s also going to provide significant tax breaks to businesses for investing in their business, and so, hopefully, at a time when we’re starting to see an upswing in economic growth, that will help sustain it.” <>


U.S., India Agree to Stronger Trade Relationship -The U.S. and India took steps to strengthen trade ties on Wednesday.  U.S. Trade Representative Ron Kirk and Indian Minister of Commerce & Industry Anand Sharma signed an agreement to establish closer bilateral trade and investment between the countries. The accord is “a manifestation of our shared objectives to enhance the bilateral trade relationship, but it is just the beginning of that process,” Kirk said. “Both governments have agreed that the time has come to elevate the partnership between India and the United States of America to a higher level,” Sharma said. The trade framework will focus on goals such as enhanced intellectual property rights awareness and enforcement, increased cooperation on health care, education, information technology and environmental services, and more partnerships in the private sector. Kirk and Sharma also announced an initiative to better integrate small and medium-size businesses into the two countries’ markets.  <>


U.S.-Made Apparel Prices Fall in Feb. - Wholesale prices for U.S.-made apparel declined 0.1 percent in February compared with January and fell 0.2 percent compared with a year earlier, the Labor Department said Wednesday in its Producer Price Index. Women’s apparel prices rose 0.1 percent in February compared with a month earlier, but declined 0.4 percent year-over-year. Men’s apparel prices fell 0.8 percent in February and were down 0.2 percent in 12-month comparisons. Prices for all U.S. goods and services declined a seasonally adjusted 0.6 percent in February, driven primarily by falling energy prices. “Top-level producer prices are being bumped up and down month-to-month by fluctuations in imported crude oil prices,” said Brian Bethune, chief U.S. financial economist at IHS Global Insight. Prices for core finished goods were flat in February and there are no signs of inflationary pressures, he said. The PPI for apparel is not a true indicator of industry price fluctuations because the vast majority of clothing sold in the U.S. is imported. The Consumer Price Index, due out today, is a more accurate measure because it includes all goods sold at retail.  <>


National Retail Federation names new president/CEO -  National Retail Federation, a key trade association representing U.S. retailers, named Matt Shay as its next president and chief executive following the retirement of Tracy Mullin, who was CEO for 17 years. Shay joins NRF from the International Franchise Association, where he served as president and CEO. Shay will be elected formally at the June 22 NRF board meeting, NRF Chairman and Macy's Inc Chief Executive Terry Lundgren said in a statement on Wednesday. "Retail is the lifeblood of our economy and with the challenges we face on Capitol Hill, the stakes have never been higher. There is a lot of work to be done...," Shay said in a statement. (Reporting by Dhanya Skariachan; editing by John Wallace) <>  


This morning's claims data was better. Claims dropped 5k week over week to 457k from 462k (no revision), while the 4-week rolling average declined by 4k to 471k from 475k. The following chart shows the rolling average trend line. Below that we show the raw data.




It is worth noting that next week, barring a significant uptick in the printed number, the rolling average number should fall materially. If next week's claims number is flat week over week the rolling average will fall by 10k - a large enough number to get people's attention, though still not enough to get claims back inside our 3 standard deviation trajectory. As we've said over the last few weeks, we continue to expect to see a claims tailwind throughout the Spring months as census hiring picks up and weather-related effects dissipate.






Joshua Steiner, CFA


According to the WSJ, MCD is pushing to sell all soft drinks, no matter the size, for $1. 



My initial reaction to the news:


(1)    MCD’s maniacal focus on TC’s is reaching a new low

(2)    It’s not good for the other industry players profitability

(3)    Most likely another sign that trends are not getting better for QSR

(4)    Whatever happened to the idea that the $1.00 menu made sense because of the add-on profits of drinks and fries?

(5)    It will make it very difficult for MCD to sell $4 blended drinks this summer


We are currently short YUM in the Hedgeye Risk management virtual portfolio.  This news puts one foot in the door to adding MCD to that list.


Howard Penney

Managing Director

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.


The Macau CEO's comments this week were probably more of the posturing sort than real substance.



There is some consternation surrounding comments this week by the Macau CEO as it relates to development.  Fernando Chui expressed a desire to slow down casino development and potentially reclaim land that is not actively being developed.  Following the address, at least one analyst expressed concern about Wynn's yet to be developed Cotai project.


The feedback we are getting from our people on the ground is that the policy address was more posture than substance.  The comments to the media after the address were certainly softer.  We do not believe Wynn's Cotai opportunity will be taken away from the company - no land has actually been formally granted to Wynn.  The Cotai option is a very valuable one for both Macau and Wynn given Wynn's track record in Macau.  We see no change in the value of that option based on the policy address.


The Macau Metro Monitor, March 18th, 2010



Holding a mass recruitment fair, Galaxy Entertainment Group plans to hire 2,000 construction workers, including over 1,000 local workers, for its Galaxy Macau project, planned to open in early 2011.



Macau CEO Chui said the 361.65 hectares of land to be reclaimed from Macau's coastal waters would be reserved for social facilities, public housing, and land auctions for private developments, not for casino development. Chui also has "no plans" to resume the government's investment immigration policy, suspended since 2007, which permits non-locals to apply for residency in Macau on the basis of simply owning a local property.


New Jersey's casino enforcement agency said in a confidential report, MGM Mirage knowingly signed on an unfit partner as it tried to gain a foothold in Macau after Chinese officials denied it a license. The report says that the enforcement division found sufficient evidence to conclude that Macau casino heiress Pansy Ho could be susceptible to influence by "unsuitable persons" because of her tight business relationship with her father, Stanley Ho. The report also mentioned a private-investigation firm, employed by MGM Mirage, who concluded that Stanley Ho was "linked closely" to 14K and Sun Yee On, two major Macau "triads," or organized crime groups, and also had links to Russian organized crime and North Korean authorities. 


In a separate article, WSJ reported that Pansy Ho is heir apparent to Mr. Ho's gambling empire. Ms. Ho, the oldest daughter from Mr. Ho's second wife, has said in the past that she is independent of her father, but serves as managing director of Shun Tak Holdings, the transport and property company that her father founded and continues to run as executive chairman. Ms. Ho also sits on the board of SJM Holdings. She acquired her casino license from SJM in 2004.

Moronic Artists

“Monetary policy is an art.”

-Ben Bernanke (March 17, 2010)


Having your office on a college campus can certainly make you over-think things. Then again, thinking outside of Washington’s groupthink isn’t all that bad of a strategy. We think that the artists of the Bubble in Global Politics should consider doing the same. YouTube is a real crusher for those who aren’t used to being held accountable for what comes out of their mouths.


The Yale Poli-Sci department may not completely agree, but political science is an oxymoron. In fact, the word oxymoron is in and of itself an oxymoron (it’s a Greek term derived from oxy, "sharp", and moros "dull").


As I was watching the House Financial Services Committee testimony of Paul Volcker and Ben Bernanke I had to stop and rewind my DVR when I heard Bernanke make the aforementioned statement about art. The man is not only a revisionist historian – he is a self proclaimed artist of political science!


If Bernanke is an artist doing his mini-Maestro thing from the highest church of political science, that must make Greek politicians morons. Or does that make sense? Does any of this make sense? What would Einstein think about applying political art to an interconnected global financial system that’s driven by elements of science and math?


I have a headache again.


I see three major global macro stories to focus on this morning:

  1. German artists breaking rank with Greek artists
  2. American artists preparing their canvases for inflation storytelling (CPI report due out at 830AM EST)
  3. Chinese artists saying to heck with what European and American artists think about ours

So let me sprinkle a little macro math onto all of this and take these paintings on one by one:

  1. Greece’s ATHEX Composite is down -2.6% in early trading this morning, taking its cumulative losses for 2010 YTD and October 14, 2009 to -7.3% and -29.7%, respectively. Since we have intermediate term TREND resistance at 2139, this makes Greece’s stock market broken. Germany is basically breaking rank with socialists from France to the UK this morning saying, look, we need to be re-elected over here at home and it’s not politically palatable to say we trust these Greek morons, nor will we sign off on bailing them out – let the IMF do it.
  2. America’s SP500 closed up at its highest-high since Bernanke said his political and banking bosses were potentially going to have a Great Compensation Depression. After closing up another 0.58%, March 17th marked not only Bernanke’s proclamation of revisionist faith that “monetary policy is an art”, but a +72.5% deflation from the March 9th, 2009 Great Depressionista low. Wait, did I throw some art into that last sentence, or has this stock market inflation been deflationary? After seeing producer prices in America printed at +4.4% year-over-year yesterday, I guess the artists who want to tell you that this morning’s CPI reading is deflationary can go ahead and sound like Moronic Artists too.
  3. China’s Shanghai Composite Index closed down 0.14% last night, taking it’s YTD losses back down to -7% for 2010, after the Chinese government released more of the hounds on the domestic artists formerly known as loan sharks (actually, they call them “land developers” I think). The Chinese Council for Promoting International Trade also issued a release notifying all political artists around the world that they are in the midst of conducting Chinese Yuan “stress tests” of their own on 1,000 domestic companies across 12 industries. Said “communists” posing as political capitalists and medical scientists all at once? Impressive.

All the while, the artists formerly known as Derivatives Salesmen from Deutsche Bank, JP Morgan, and UBS are being charged with fraud by the City of Milan as America’s Made-off artist got beat up again in jail by an allegedly unhappy viewer of this gong show. At least Cramer regularly admits he is an artist (the SEC should give him a few points for transparency as they are investigating his


What a wonderful world we global risk managers get to live in. My headache is actually going away now. Thanks for bearing with me and letting me vent. These Moronic Artists aren’t worth it. They are who they are and it’s our job to capitalize on their proactively predictable behavior.


My immediate term lines of support and resistance for the SP500 are now 1148 and 1175, respectively. I shorted the SP500 (SPY) and bought volatility (VXX) while hope was trading at a premium yesterday and I sold out of the trading long position we took in China (CAF).


Best of luck out there today,





VXX – iPath S&P 500 VIX — With the VIX down -38% since the SP500 bottomed -10.2% lower on February 8th, now (3/17/10) is a good time to buy some volatility for the immediate term TRADE as it is oversold.


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.


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.



HYG – iShares High Yield Corporate BondSuffice to say, we aren't yield chasers with High Yield priced up here. There is a big difference between high-grade and high-yield; some hopefully learned this lesson back in 2007.


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 and 3/17.


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 added to our short position for a TRADE on 3/5 and 3/17 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, we shorted IWM and added to the position on 3/2 and 3/17.


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 show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.