This week we will be getting some incremental data points on the health of the casual dining space from DRI earnings on Tuesday and Brinker’s annual analyst meeting on Friday.  In both cases I expect the news flow to be positive. 


Over the past 90 days, casual dining stocks are up an average of 34.9% while quick service stocks are up 21.8% on average.  The outperformance is attributable to the data; consumer confidence trends are showing that consumers in higher income brackets have higher levels of confidence.  Additionally, a relative improvement in higher-end retail sales (Tiffany’s today and Nordstrom in February), as highlighted by our Retail team, has been observed recently.  Household income is also picking up disproportionately at the “high end of the income spectrum”, according to J.P. Morgan’s investor day (highlighted by financials sector head, Josh Steiner, on 2/25).  Management commentary from chains like PFCB also suggests that business expense expenditures may be picking up.


Coming into the summer months, the trends in top line sales will take on increased importance for overall stock price performance.  Casual dining, like quick-service, is facing some notable operating cost increases, on a year-over-year basis, particularly in the third quarter.  As seen in the chart below, declining food costs have been a significant tailwind for the industry in 2009.  The benefit from lower food costs began in earnest in 1Q10, but the favorability accelerated throughout the year peaking in 3Q09.  It’s impossible to make a blanket statement about every restaurant company and the impact of foods costs on the P&L, but it is helpful to look at a broader measure of food cost trends. 


Given that most companies contract out a year or more (in some cases) for 75% or more food costs, the timing of higher foods costs impact on the P&L is delayed by six months or more.  The broadest measure of overall food inflation, The CRB Foodstuffs Index, is trending upwards and is likely to remain at elevated levels for the next few quarters (currently at +15.7% YoY) given that 2Q09 saw a decline of -30% YoY for the Index.


Given the current trends, 3Q09 will be a very difficult quarter for the industry from a cost stand point, putting incremental pressure on the sales trends to continue to improve. 




Additionally, it’s not likely that labor costs will provide any tailwind for Casual Dining operators.  Unionization is not currently in the media’s crosshairs but it is probably going to be a focus of the current administration at some point in the next three years.  It is also worth considering the chart below; labor costs are growing at a steady rate on a two-year average basis.


CD – LOOKING AT THE TRENDS FOR 2010 - cd labor costs


EBIT margin trends, shown in the chart below, vividly illustrate the benefit of cost cutting and lower food costs that occurred through 2009.  As it stands now, it’s is not very clear where any margin tailwind will come from unless there is positive traffic trends and incremental pricing.  Labor cost trends are not promising and food costs look set to increase as a percentage of sales in the middle and second-half of next year.  As a point of reference, EBIT margins rose 110 bps in 3Q09 and 120bps in 4Q09; it will be difficult for the casual dining chains to match these levels of margin expansion. 


CD – LOOKING AT THE TRENDS FOR 2010 - cd ebit margin


Sales trends in casual dining are showing considerably more stabilization that in quick service restaurants.  We are hearing that February and March same-store sales results continue to improve on a sequential basis.  On a two-year average basis, sales trends in January improved by 380bps from December, to -3.2%.  The improvement is impressive despite the fact that unemployment, the increase in the savings rate, and inflationary consumer prices are all a potential drag on spending patterns.


It seems that, as PFCB management alluded to, an improvement in “expense account” spending could be helping trends at casual diners.   While consumer confidence among higher income brackets is currently providing a boost to casual dining, a reversal in the overall stock market could quickly change this.  Darden restaurants is reporting after the close Tuesday and I will be eager to hear what commentary, if any, they offer on current trends in early fiscal 4Q10.





Howard Penney

Managing Director

Being Japanese

We had our Sovereign Debt Conference call last week (email us if you want the slides), and highlighted that on a number of metrics, specifically debt-to-GDP and deficit-to-GDP, the United States has comparable ratios to the PIIGS.  In effect, the United States is a PIIG.


We have highlighted our concerns over growing debt issuance in the United State many times, and we are not alone in this regard.  According to our estimates debt issuance by the U.S. government grew by 24% in 2008 and 22% in 2009.  Currently, the United States has $12.6 trillion in debt on its balance sheet, with a debt-to-GDP ratio of 88% (this according to estimates at  Our view is that too much debt is bad, and based on long term historical studies, we are nearing that “too much” level.


Those who support increasing levels sovereign debt levels in the United States, point to Japan.  The Japanese currently have a debt-to-GDP ratio of almost 200%, and, as the narrative fallacy goes, they are fine.  This higher debt ratio is cool because most of it is owned domestically by the government (about half) and 95% of the remainder is owned by Japanese citizens, so foreign investors have very little sway.  In addition, Japan has very low interest rates, and its overall cost of servicing debt is 1.3%. All good, right? Being Japanese is cool?


Now certainly, these are facts, and facts are good, but the question remains: Do we want to become like the Japanese?  This is certainly not a bigoted point, and I for one absolutely love Sushi, but one look at a long term chart of the Nikkei 225 over the past thirty years, and we get our answer.  This major Japanese stock index has done nothing but go straight down for the last 20+ years.  So, while the country hasn’t defaulted and her interest rates are low, Being Japanese, is not all it is cut out to be.


Obviously the primary issue in Japan is long term deflation, and our view is that the opposite will likely occur in the U.S., at least in the short term, which is inflation.  The point is, though, as the counter argument goes, if we are wrong on inflation, then maybe all this debt isn’t so bad.  It probably isn’t bad if you don’t mind two decades of lower highs in your stock market. 


Daryl G. Jones

Managing Director


Being Japanese - nikkei


R3: China Banter Matters To Retail


March 22, 2010


There are several unrelated items out this morning on China that ultimately have implications for both the US consumer, and segments of the retail supply chain. They might not immediately matter to today’s results in your ‘space.’ But we need to manage tail risk.





First, how can we not hit on Google. Even if Google is ‘not in your coverage space,’ you absolutely must track the implications on the Macro landscape. Per Allison Kaptur on the Hedgeye Tech team…


China is nobody’s fool.  Over the weekend, Chinese state-run media sources played up connections between Google and the U.S. government, including accusations that Google feeds search data to the CIA.  They’re reframing the debate on their own terms: from (Western) freedom versus censorship to (Chinese) freedom versus American imperialism.  I think the quotes speak for themselves, and show exactly how Google’s slogan “Don’t be evil” is received.


From Xinhua: "Some Chinese Internet users who prefer to use Google still don't realize perhaps that due to the links between Google and the American intelligence services, search histories on Google will be kept and used by the American intelligence agencies." 


From the English language website of China Radio International: “Google's relations with the US government cannot be deeper. US media has said Google was the fourth-largest supporter of Barack Obama in his election campaign. Four of the company's former executives including Sumit Agarwal, who was the product manager for Google Mobile team and is currently deputy assistant secretary of defense, are now serving the US government.”


This is purely political, folks…


Second, check out the article on Bloomberg this morning (China Accuses U.S. of Politicizing Yuan as Trade Surplus Sinks). In effect China’s Commerce Minister Chen Deming said that pressure on China to strengthen the yuan does “no good to anyone.” Tensions over China’s currency are mounting, with President Obama facing increased calls from U.S. lawmakers to step up pressure on China for keeping its exchange rate artificially low. Chen yesterday warned that sanctions against China that amounted to protectionism would hinder growth and raise the risk of a “double dip recession.”


So in effect, political tensions continue to heat up, with little sign of a light at the end of the tunnel. We’re just a couple of moves away from the Mensa Society in Washington spurring Chinese retaliation that would start to meaningfully impact prices of goods coming into this country. In the end, we could have a situation where Consumers are being hit with uncontrollable inflation while China continues to dump Treasuries and drive rates higher. 


I understand that there are dozens of scenarios that could, and likely will, impact and likely complicate the simple setup here. But we need to manage around tail risk – especially given that few people seem to be putting 2 and 2 together here.




  • Ralph Lauren’s online fashion show for its Lauren line is the first to offer the consumer the option of actually purchasing the clothes worn on the runway- in real time. The virtual and e-commerce enabled fashion show also includes fashion commentary from four fashion editors. We wonder how long it is before other brands catch on and start showing and selling in-season merchandise simultaneously. 
  • Perry Ellis management noted that conservative planning on the part of most or their retail customers is resulting in low inventory levels at the current time. As a result, they are seeing increased sales that require faster replenishment and orders being pulled forward for earlier delivery. 
  • A study by Unica, a marketing technology provider, revealed that 84% of marketers expect to use at least one form of an Emerging Marketing Channel (rich media, mobile marketing, or social media) this year. As of now, social media is the most popular of the emerging channels with 47% of currently utilizing it for marketing purposes. Mobile marketing remains the least penetrated, with just about one-third of respondents using mobile advertising in 2009. 
  • According to Kantar Media, total advertising spend for 2009 was down 12.3% to $125.3 billion. However, there were just two subcategories that saw growth for the year, Internet up 7.3%, and FSI’s (Freestanding Inserts) up 3%. Newspapers and radio were hit the hardest, with declines in advertising revenues of 20% for each. 




Nike and UCF Agree to Footwear and Apparel Contract - In the wake of having is footwear and apparel contract with Adidas terminated after freshman men’s basketball player Marcus Jordan, the son of hall of famer Michael Jordan, refused to wear team issued footwear in favor of his father’s Air Jordans, UCF has reached a five-year agreement with Nike to provide all Golden Knight athletic teams with footwear and apparel, according to a report in the Orlando Sentinel. "We had explored a number of different options with a number of different manufacturers and equipment providers, and ultimately we have reached an agreement with Nike," said UCF Executive Associate Athletic Director, David Chambers. As the university’s exclusive contract with Adidas will expire on June 30, its deal with Nike will commence on July 1. UCF was rumored to also have engaged in talks with Russell Athletic and Under Armour while seeking a new provider for its athletic program. Officials from Nike are expected to visit with UCF administrators next week to assess the full needs of the athletic department and have assured the school that it will be provided with all necessary equipment in time for the beginning of the fall sports season. Providing new uniform designs for each sport is expected to be one of the first goals for Nike. <>


Polo, North Face Fight Online Fakes - Polo and The North Face are on the warpath against counterfeits.  In what legal observers say is the largest case of its kind, Polo Ralph Lauren Corp. and VF Corp.’s The North Face brand have used a federal lawsuit to strike at a large network of more than 130 Chinese Web sites selling counterfeit goods to U.S. customers through up to 6,500 domain names. According to court documents unsealed this week, the two apparel firms’ own investigations recently uncovered a ring of related Web sites that, since January 2008, have moved as much as $780,000 a month in fake Polo and North Face goods at domains such as and While Polo and The North Face are the only two plaintiffs in the case, the accused counterfeiters also offered goods from a varied list of brands including Dior, Ed Hardy, Coach, Gucci, Paul Smith and Abercrombie & Fitch. Such cybersquatting enterprises have gained in favor among counterfeit sellers in recent years for their comparatively low-risk level and relative anonymity. But in their joint suit, filed March 1 in U.S. District Court in Manhattan, Polo and The North Face say the domain names are largely traceable to the operators of one Web site,, and an affiliate program it uses to help other parties sell counterfeit wares. Lawyers for the firms wrote the operation is “of a size and scale they have not seen before.” <>


Penney's and Olympic Gymnast Nastia Liukin Launch Girls' Line - J.C. Penney Co. Inc. and champion Olympic gymnast Nastia Liukin are going for the gold with a full lifestyle collection for girls ages eight to 12, called Supergirl by Nastia. The line, which will retail at between $20 and $38, hits stores July 20 for the back-to-school season. It includes knit dresses with detachable necklaces, tunics, tops, pants and leggings, as well as a dance and fleece activewear collection. For Penney’s, it also represents a re-entry into the girls’ activewear category. Supergirl by Nastia is a three-year exclusive partnership among the retailer, Liukin and Warner Bros. Consumer Products, which owns the Superhero property. It will take up prominent real estate in Penney’s girls’ and activewear departments, with placement by the aisles, as well as a hot spot in the center of the department showcasing looks and images of Liukin. “We’ve seen a big trend towards activewear in our boys’ department, and this is a natural complement to that — an ‘actionista’ collection with a real style quotient,” said Clark McNaught, Penney’s senior vice president and general merchandise manager for children’s apparel. “We’re not slapping a shield on a T-shirt. We’re trying to make it more relevant to what’s happening in the market.” <>


VF's Wiseman Sees Pay Drop 9.3% - VF Corp. chief executive officer Eric Wiseman’s pay contracted 9.3 percent last year, to $7.2 million, as a higher salary and nonequity incentive plan compensation were unable to offset the loss of a bonus and a decline in stock and option awards. Wiseman, chairman, president and ceo of the Greensboro, N.C.-based apparel powerhouse, saw his salary move up to $1.04 million from $950,000 and incentive plan earnings rise to $1.15 million from just less than $119,000 in 2008. But he received no bonus, versus a $641,250 payment in 2008, and his stock and option awards fell 27 percent to $4.2 million from $5.7 million in the prior year. Because of vesting schedules and fluctuating stock prices, stock and option awards weren’t necessarily realized but are reported when public companies submit their definitive proxies to the Securities and Exchange Commission, as VF did on Friday. Wiseman earned a total of $8 million in 2008 and $4.9 million in 2007. President of the firm since 2006, he became ceo in January 2008 and chairman seven months later. <>


Sears spends $140,000 on lobbying - Department store chain Sears Holdings Corp., operator of Kmart and Sears, Roebuck and Co., spent $140,000 on lobbying in the fourth quarter on credit card reform legislation and other issues, according to a recent disclosure form. That was less than the $180,000 the company spent in the third quarter of 2009 but twice the amount it spent in the fourth quarter of 2008. Sears also lobbied on legislation involving pension funding, according to the report it filed Jan. 20 with the House's clerk's office covering October through December. One of the highest-profile issues Sears monitored was the Credit CARD act, now a law, which is meant to give credit card users more information and stop policies that many consider abusive. <>


New Look gears up for fresh IPO bid - The fashion retailer New Look could resurrect its £1.7bn flotation plans this week when its board meets to consider if market conditions have improved sufficiently since the deal was postponed last month. Executives at the group, owned by private equity firms Apax and Premira, are set to meet on Tuesday to consider the move. Any listing could come as early as June, just five months after the IPO failed to gain traction with investors for a second time in three years. The deal was pulled, along with those for the ticketing business Travelport and Legoland owner Merlin Entertainments, after only lukewarm support from investors. Since the plans were shelved, some deals have been successful, giving the New Look's owners renewed confidence. New Look shelved its planned IPO blaming volatile markets. The group, which has debts of £1.1bn stemming from its leveraged buyout, insisted that decision was a postponement rather than a cancellation. Similarly, Travelport and Merlin, which are also heavily indebted after private equity buyouts, respectively shelved £1.2bn and £2bn listing plans. <>


Samuelsohn Sold to Grano Retail Investment - Samuelsohn Ltd., the Montreal-based tailored clothing brand, has been sold to Grano Retail Investments, an investment and advisory company headed by Stephen Granovsky. Terms were not disclosed, but financing was provided by BDC, Canada’s business development bank. Granovsky, Grano’s founder and chief executive officer, will become ceo of Samuelsohn, an 87-year-old family-owned business. Twin brothers Michael and Richard Samuelsohn, grandsons of the founder, will exit the company. Grano’s plan is to significantly enhance the visibility of the business, expand distribution and add product classifications. The firm produces private label suits for Paul Stuart and Harry Rosen and sells its own Samuelsohn-label goods to 250 upscale specialty stores in the U.S. and Canada.  <>


Bigger Bra Sizes Bolster Sales - Bra sizes in the U.S. are larger than ever as manufacturers and retailers try to accommodate the rising number of full-figure women. The median size a decade ago was 36C. Now there is demand for DD, DDD and G cups, and bra makers are reaching even higher with a K cup. The business impact of full-figure bras and related undergarments is substantial. Retail sales of full-figure bras from 2008 to 2009 rose 3.3 percent, to $2.15 billion, and the number of bras sold in the category gained 7.4 percent to 158.8 million units, according to research firm NPD Group. Overall sales of bras last year increased 1.1 percent and accounted for $5.8 billion of the total $10.67 billion innerwear business. Several factors are turning a traditional niche area into a flourishing category. The obesity epidemic has generated a base of consumers that is demanding a wider choice of basic, fashion and specialty product. Oprah Winfrey, whose power to make a bestseller, spawn trends and influence public opinion is unrivaled, introduced Bra Fit Interventions, explaining proper fitting, to millions of viewers on her television show. She feels so strongly about the subject that Bra Fit Tips for full figures are featured on with the tagline, “Ladies, Rise to the Occasion.” <>


PayPal forges an alliance with China’s largest payment card network - PayPal has struck a deal with China’s largest domestic payment card network, China UnionPay, that will enable billions of Chinese consumers to buy goods online from foreign merchants. PayPal also says it will double its Asia-Pacific workforce to 2,000 by year’s end. Chinese consumers hold 2.1 billion UnionPay cards, most of which are debit cards, according to PayPal and figures from the state-backed UnionPay. Consumers with UnionPay cards will be able to initiate PayPal transactions in the third quarter, says PayPal, the online payment processing service owned by eBay Inc. The partnership is designed to make it easier for Chinese consumers to make cross-border transactions. “PayPal’s partnership with China UnionPay removes an important friction point that exists across borders,” says Scott Thompson, PayPal president. “We are thrilled to eliminate the payments barrier so merchants can welcome millions of new Chinese customers to their sites.” PayPal says it has 81 million active accounts across the world. PayPal in China will face competition from Alipay, the online payment service operated by China-based e-commerce firm Alibaba Group, in which Yahoo in 2005 bought a 39% stake. Alipay says it has 300 million registered users. Alibaba also operates a consumer auction site,, which analysts have estimated controls up to 9 <>


Dollar Stores, Fast Food to Add Space in 2010, Colliers Says - Dollar General Corp., Saks Inc.’s Off 5th and Chipotle Mexican Grill Inc. are among the discounters and fast-food chains set to expand in 2010 as U.S. consumers embrace a “new frugality,” according to commercial property broker Colliers International. Low-cost restaurants and retailers, including Papa John’s International Inc.and TJX Cos., are planning to add stores following the loss of more than 4 million U.S. jobs last year and a reduction in consumer spending, Boston-based Colliers said today in its 2010 “Retail Trends & Opportunities” report. “The ‘New Frugality’ is here for at least five years,” Garrick Brown, national retail research director for Colliers, said in the report. “Necessity and off-price retailers will continue to fare best.” Last year’s rise in unemployment, which followed a loss of 3.1 million jobs in 2008, hurt retailers and their landlords as consumers curtailed spending. The National Retail Federation predicts that retail sales, excluding automobiles, gas stations and restaurants, will increase 2.5 percent this year following a 2.5 percent drop last year. Job losses likely will bottom out this quarter, Colliers said. The bankruptcies of Circuit City Stores Inc., Linens ‘n Things Inc. and Gottschalks Inc. in 2008 and 2009 contributed to rising retail vacancies across the U.S., sending rents down 25 to 40 percent, depending on the market, Colliers said. Lower rents have been “a huge factor” in the expansion of Dollar Tree Inc.; TJX’s T.J. Maxx and Marshalls stores; and Ross Stores Inc.’s Ross Dress for Less chain, Colliers said. <

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.47%
  • SHORT SIGNALS 78.68%


Unemployment has been a statistically more significant variable in driving RevPAR than GDP over the last 10 and particularly 5 years. The implications are a potentially slower RevPAR recovery than in past recessions.



GDP has been the universally accepted hotel demand driver.  GDP is important, no doubt, but our regressions using more recent data show that unemployment is a statistically more significant driver of revenue per available room.  While not as meaningful as unemployment or GDP, the housing price index has also been an important variable. 


Here are the T-Stats and R Square from our regression of RevPAR to GDP, unemployment, and housing.  As can be seen, the significance of the unemployment variable in driving RevPAR is higher than GDP in the last two 5-year periods.  Moreover, the relative significance of unemployment increased in the last 5-year period.




Joel Ross wrote an interesting (at least for us geeks) article in Hotel News Now entitled “Industry Uses Wrong Metrics to Project RevPAR” that provides some insight on why GDP may not be as important.  “The increases in unemployment, home foreclosures, bank balance sheet strength, lending to small business, consumer balance sheets and the entire capital markets environment are different this time” wrote Mr. Ross in explaining why there may not be a V-shaped RevPAR recovery as was experienced in past downturns.  Mr. Ross goes on to say that essentially the historic relationship of GDP to RevPAR may lessen since increases in government spending are inflating GDP.


Insightful commentary, no doubt, and we would like to add a few bullets:

  • Housing prices have moved more independently from GDP over the last 10 years and may continue to do so as housing remains under pressure
  • Consumer leverage is still high by historical levels
  • Unemployment may take longer to revert to historical norms and the wild swings over the last few years causes uncertainty and potentially a higher savings rate
  • Companies don’t seem as quick to open the purse strings as in previous recoveries which means less hiring and less travel
  • More government uncertainty – taxes look like they are going higher at the federal, state, and local levels to combat ballooning deficits
  • Historically low interest rates may not be sustainable
  • Potential for inflation

None of these factors will be good for RevPAR even if GDP continues to bounce back.


The Macau Metro Monitor, March 22th, 2010



A decision to fill in a 13-hectare lake, which is bounded by Lotus Avenue and Estrada do Istmo (Isthmus Road), near the Macau Dome stadium, to build a public hospital highlights the Macau government's dire shortage of land after years of land hoarding by speculators. Citing population growth and lack of medical services, CEO Chiu listed the building of a hospital on the Cotai Strip as a high priority and reassured legislators that the government will deal with undeveloped land in accordance with the laws, as filling a lake while there are large undeveloped sites nearby has sparked criticism of the government's inability to seize land from speculators. Large sites totaling at least 50 hectares sit idle near the lake.


Legislator Au Kam-san, a veteran watchdog of Macau's land policies, said it was absurd not to use an existing site.

Au said at least three undeveloped sites could be used to build the hospital. A 10.6-hectare plot to the east of Macau Dome was sold to a company controlled by Chui Sai-cheong, an elder brother of the CEO, for 231 million patacas, or 2,179 patacas per square meter, in January 2006, according to the Government Gazette. According to the gazetted land deal, a hotel had to be built on the site by January 2009. This means the government now has the right to seize the undeveloped site under Macau law. Another plot of over 10 hectares to the west of Macau Dome is also vacant. It is unclear who owns that site as the government has not made the information public. A third plot of more than 10 hectares to the south of the Grand Waldo casino hotel belongs to Galaxy Entertainment and is not being developed.


Macau's Land Law requires government land sales to be carried out through public bidding, with exceptions allowed only with the chief executive's permission. Yet since the 1999 handover, only a handful of more than 400 sites sold by the government have gone through the public bidding process. In a rare open land auction in January 2008, two plots in the Macau Peninsula's northern Fai Chi Kei area totaling 4,700 square meters fetched HK$1.4 billion, or HK$297,872 a square meter. The prices for many land deals in the past few years were less than 10% of the open bid price.



CPI for February 2010 rose by 2.57% YoY; the increment was attributable to the price increase of the Food & Non-Alcoholic Beverages. Price indices of Recreation & Culture; Transport; Clothing & Footwear; Miscellaneous Goods & Services; and Food & Non-Alcoholic Beverages rose by 8.64%, 7.87%, 7.84%, 7.33% and 4.82% respectively, on account of soaring charges for outbound package tours, meal brought away from home and hairdressing services, rising prices of gasoline, gold jewelery, clothing, vegetables, fresh fish and seafood during the Lunar New Year period.


The CPI-A (103.0) and CPI-B (103.28) for February 2010 increased by 1.99% and 2.62% YoY respectively. The CPI-A relates to about 50% of the households, which have an average monthly expenditure of MOP6,000 to MOP18,999. The CPI-B relates to about 30% of the households, which have an average monthly expenditure of MOP19,000 to MOP34,999.



The Financial Services Bureau says direct gaming tax receipts for the first two months of 2010 rose 54% to MOP9.26 billion. These receipts accounted for 86.55% of total government revenue, which reached MOP10.7 billion, a YoY increase of 45.8%.



The Monetary Authority of Macao released data that showed M2 grew 1.5% MoM to MOP 215.4 billion in January. Resident deposits grew 1.5% from the previous month to MOP 210.4 billion. Non-resident deposits dropped by 16.9% MoM to MOP 69.1 billion and public sector deposits with the banking sector decreased 6.5% to MOP 15.2 billion. As a result, total deposits with the banking sector declined 3.9% from the previous month to MOP 294.8 billion. Domestic loans to the private sector expanded 1.8% MoM during January to MOP 102.7 billion. As domestic loans to the private sector rose at a faster pace than resident deposits, the loan-to-deposit ratio for the resident sector grew 0.4% this month to 45.5% at the end of January 2010.


Each nation feels superior to other nations. That breeds patriotism - and wars.
  - Dale Carnegie


On the MACRO front, continued concerns over sovereign credit in Europe seemed to be the driving theme behind Friday’s decline. The Greek PM suggested that Greece might have trouble accessing the market in order to refinance its debt later in the spring.  According to street account, “In a speech mostly for domestic consumption in front of one of the Greece’s unions Papandreou raised the stakes in a competitive game of political posturing.”


The Germans aren’t buying it.  According to Bloomberg, “German Chancellor Angela Merkel told investors they shouldn’t expect this week’s European Union summit to agree on assistance for Greece, resisting calls for the specifics of a rescue plan and helping send Greek bonds to their lowest in more than three weeks.”


The S&P 500 declined by 0.5% on Friday, but was up 0.8% for the week.  While the S&P traded within a relatively narrow range, the breadth continues to decline as small caps underperformed large caps on the day.  Every sector declined on Friday and only two sectors outperformed the S&P 500.    


Also on the MACRO front, India raised its repurchase rate on Friday, which was a surprise and a concern for US equities. Further, India central bank Governor Duvvuri Subbarao also alluded that he’ll likely raise rates again next month.


Although down slightly on Friday, Healthcare (XLV) was the best performing sector, along with Consumer Discretionary (XLY) and Consumer Staples (XLP) on Friday.  Many cited reduced uncertainty regarding healthcare reform as providing support for the sector. Managed health preformed well; the HMO index was up 2.7% on the day. 


The Dollar index was up 0.62% on the day and 1.1% on the week.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (80.34) and sell Trade (80.92).  The strength in the dollar knocked down the REFLATION trade and related sectors.  On Friday the three worst performing sectors were Energy (XLE), Materials (XLB) and Utilities (XLU).   


The strength of the dollar and Crude's big drop (1.8%) on Friday provided significant pressure on the XLE and the XLB.  In early trading, Oil is trading down below $80 a barrel.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (79.85) and Sell Trade (83.63). 


Last week Technology (XLK) was also a notable underperformer.  Last week the XLK underperformed the S&P 500 by 70bps.  On Friday, PALM reported disappointing earnings and provided guidance significantly below expectations; smart-phone sell-through was well below expectations.  The SOX declined 1.7% on the day. 


The VIX gained +2.1%, although off its highs at the close and closed down 3.5% for the week.  The VIX continues to be broken on all three durations - TRADE, TREND and TAIL.  The Hedgeye Risk Management models have levels for the volatility Index (VIX) at:  buy Trade (16.39) and sell Trade (18.79). 


In early trading, equity futures are trading below fair value after the House of Representatives approved a bill overhauling the health-care system in a 219-212 vote and India’s interest rate increase.  The US MACRO calendar is void of any significant events. 


In early trading, copper in Shanghai fell by the most in a week as supplies expanded significantly.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.31) and Sell Trade (3.43).


In early trading Gold is trading lower as the Dollar is trading near a three week high.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,096) and Sell Trade (1,120).


Restless 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.