Our Financials analyst Josh Steiner has posted some important notes over the past few days.  I am summarizing some of his thoughts and highlighting two charts that warrant close attention.


First, at Hedgeye Risk Management, we think the Fed is behind the curve and that it's now just a matter of time before the Fed begins raising rates.  As Josh pointed out “while on the surface this would seem negative for Financials, in fact it has historically been a positive sector indicator.”


Second, headed into the 1Q10 earning season part of the industry is well positioned.  On Thursday, in a post entitled “XLF SECTOR THOUGHTS AHEAD OF 1Q EARNINGS”, Steiner states, “To summarize, we think the big banks, as a group, should fare better than the small banks in first quarter earnings. That said, going into 4Q earnings, the stocks were coming off a down 3.6% quarter for the XLF. This quarter, the XLF is coming off a +10.8% move to the upside with a more mixed profile. Margins should be better sequentially, but it looks as though reserve builds may be slightly higher than last quarter. Earning assets will be down comparably with last quarter and ASF marks should be slightly better.”


“On the small cap side, margins will be better, but credit should be worse, earning asset growth will accelerate to the downside and ASF marks will not be the tailwind to capital they were in 4Q09. Conclusion: we think much of the good news associated with earnings is already priced into the sector at large, but the big banks should outperform the small banks.”


Third, the XLF is in a BULLISH FORMATION and below are the current Hedgeye Risk Management levels on the XLF.




On the margin front, the environment has clearly improved further for the sector.  As the following chart shows, the 2-10 yield spread - a good proxy for the sector at large - pushed higher to an average 280 bps in the first quarter, up 22 bps from the 259 bps average in 4Q09.






Howard Penney

Managing Director

The Elephant in the Room

March’s ISM Non-Manufacturing Report on Business confirm just what we have been seeing on the inflation front: more acceleration to the upside.


The March ISM Non-Manufacturing survey came in at 55.4, up 4.5% sequentially and above consensus, which was at 54. Going back in time, this is the highest reading since May 2006! Similar to last week’s ISM Manufacturing report, this release screams inflation. Even the service industry, whose costs aren’t necessarily married to the price of commodities like their manufacturing counterparts, is expecting inflation to accelerate meaningfully in the near-to-intermediate future.


Naysayers and tellers of narrative fallacies will point to all the unemployment figures, slack numbers, and core CPI readings in order to keep alive their fledgling Depressionista narratives. That’s fine. They can miss the bus and be late to class all they want. Fortunately for us (and the bond and currency markets), we’ll be at our desks when the bell rings and global cost of capital will start to rise.


Here’s a current snapshot of the global inflation picture:

  • ISM Manufacturing for March just made another higher-high at 59.6 (versus 56.5 in February).
  • Prices Paid continue to ramp, coming in at 75.0 in March (versus 67 in February).
  • After shooting up another +7.8% last week, oil prices are hitting 17 month highs ($85.35/barrel).
  • After melting up another +5.9% last week, copper prices are hitting 20 month highs ($3.61/lb).
  • 2-year US Treasury  yields are up +37% in the last month and hitting new highs again this morning at +1.10%.
  • Russian stocks are up again this morning, inflating their petrodollar stock market to +12.1% YTD.
  • Japanese stocks were up again overnight, inflating their currency debased stock market to +7.5% YTD.
  • Turkish inflation for March was reported at +9.6% year-over-year growth.


While we take some issue with the U.S. government's calculation of inflation (they’ve changed the calculation nine times since 1996), even federal economists have reported inflating prices this year. The January CPI came in at 2.6% and February reported at 2.1%. We expect March figures to accelerate even further. There will come a point in the next 3-6 months when He Who Sees No Inflation will no longer be able to be willfully blind towards inflation picture.


When you keep feeding the four-ton elephant in the room (which Bernanke is doing with his “extended and exceptional” emergency interest rate policy of ZERO percent), there will come a point where you can’t avoid bumping into it. We can only hope that he bumps into it soon and ready to reacts in a manner that takes into account the best interests of the citizens who actually feel in their wallets ALL the components of an accelerating CPI report. Unfortunately for America at large, Helicopter Ben has only raised the Fed Funds Target Rate once since taking over back in early 2006 (June 29th, 2006 to be exact). Let’s just say experience is not on his side.


The next FMOC meeting is scheduled for April 27th - 28th.


Darius Dale



The Elephant in the Room - ISM Non Manufacturing


The Elephant in the Room - Fed Funds Target Rate

R3: Notable Athletic Trends in Advance of 'Sales Day'


April 5, 2010





With sales day on the near-term horizon, we released our first monthly Edge on Athletic Trends report capturing the latest market share trends by channel, category, and brand last week. Here are some of the highlights:


  • After a long period of underperforming, footwear consistently stood out as a top performer over the past month.
  • But over the past two weeks, athletic apparel and footwear have tracked retail in aggregate over the past 2-weeks, suggesting that weather trends are in fact influencing traffic – though all sales remain at a very healthy level.
  • We’re seeing Athletic Specialty sales trump Family and Mass channels – exactly what we should see at the start of the cycle we’re seeing develop.
  • Nike brand dominating. Jordan status quo. Converse raising yellow flags.
  • UA’s numbers will look weak until around the 1Q EPS report.
  • The Adibok story hinges on hope and prayer.
  • Columbia emerging as potentially good long idea – something to consider into next week’s earnings report.


R3: Notable Athletic Trends in Advance of 'Sales Day' - Footwear Apparel Athletic Specialty Chart


R3: Notable Athletic Trends in Advance of 'Sales Day' - Sporting Goods Table


R3: Notable Athletic Trends in Advance of 'Sales Day' - Retail Industry Chart





  • Due to overwhelming demand, a sample sale for American Apparel was shut down by police in London. After letting just 100 customers into the event, the unorganized crowd became restless and violent. As people in the crowd began to get crushed, the police stepped in and closed the entire event down. With so many controversial image problems, this yet another black mark for the brand.


  • According to Pew Research, in 2008, an estimated 49 million Americans, or 16% of the population, lived in a family household that contained at least two adult generations or a grandparent and at least one other generation. In 1980, this figure was just 28 million, or 12% of the population. The last time this high a percentage of the US population lived in a multi-generational family household was in the late 1950s. Most economist believe the recent recession is the key driver of families consolidating under one roof.


  • According to online private sale operator, Gilt Groupe, 7% of the company’s weekend sales are originated from the company’s iPhone app. Interestingly, only 3.8% of consumers used mobile devices to actually purchase goods on Cyber Monday, the busiest online shopping day of the year. It’s no wonder the company has already developed an iPad version of its mobile commerce interface. A bigger and better screen likely means far more shopping…




R3: Notable Athletic Trends in Advance of 'Sales Day' - Calendar





Chinese Labor Squeeze - Chinese labor squeeze could fuel higher apparel prices. A continuing shortage across China’s manufacturing zones, particularly in the lowest-paying jobs, appears to be showing no signs of letting up and could eventually lead to price hikes in Chinese goods as factories are forced to pay higher wages. Labor experts said that as the scarcity of labor increases, companies may need to choose between moving their operations further inland or pay more to attract workers to the Pearl River Delta and other manufacturing hubs. The shortage arose in part because of the government’s aggressive economic stimulus efforts.  <>


Stats On Chinese Manufacturing - Nearly 83% of 202 foreign manufacturers in China said that their primary motive for locating there was to access the Chinese marketplace, up from 71% two years ago, according to a recent survey. Yet the survey also shows fewer foreign manufacturers consider China a good export platform for the rest of Asia because of rising labor costs and other factors. <>


Japanese Teens Seeing Budgets Tighten - Young people in Japan are some of the most fashionable on the planet, but teenagers and young adults are facing shrinking budgets for apparel and accessories. High school students’ average monthly allowances fell 11.4% in 2009 to $64.68. That’s the lowest level in 19 years. Allowances of university students fell 4%. <>


Carter’s Launches Two E-Commerce Sites - The children’s clothing manufacturer has launched two e-commerce sites, and The sites feature a shopping cart that collects items from both sites, enabling consumers to check out once. <>


Haggar Clothing Co. Launches E-Commerce Site - Haggar Clothing Co. this week launched an online retail site where consumers can buy such items as pants, shorts, suit separates, outerwear and accessories.  <>


Old Navy Posts a 287% Month-over-Month Traffic Increase in February - Old Navy attracted 6.34 million visitors in February, a 287% increase from February 2008, as it registered the biggest traffic jump among apparel and beauty products during the month, Nielsen NetView reports. <>


Furniture Retail Orders Up - New retailer orders for furniture rose 4% in January compared with the same month last year, according to the Furniture Insights survey of residential furniture manufacturers and distributors conducted by the High Point accounting and consulting firm Smith Leonard. <>


Upper Deck and Tiger Woods Items - All the polls might reflect that Tiger Woods is at his lowest approval ratings, but the memorabilia market for Woods' items hasn't cooled in the same fashion. Upper Deck spokesman Terry Melia said that the company will sell range balls hit by Tiger with an autograph in a display case for $499, autographed Black TW Nike hats for $999.99, Tiger autographed 2010 golf cleats for $1,399.99 and the same style Nike Dri-Fit shirt Woods will wear on Masters Sunday autographed for $1,799.99. <>


Children's Trends: Zippers - Zippers are doing double duty this fall. No longer just functional, the metal fasteners are taking on a decorative role, snaked across uppers and cuffs and even twisted into rosettes. <>


R3: Notable Athletic Trends in Advance of 'Sales Day' - boot


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.

Inflation Is Popular

“In spite of the cost of living, it’s still popular.”

-Kathleen Norris


That’s what Kathleen Norris had to say about inflation in the Roaring 20’s. She was a romance novelist from California. Writing books between 1911 (“Mother) and 1941 (“The Venables”), Norris made more money than most female authors of her time. She was well known for her San Francisco perspective on living the upper-class lifestyle. To this day, inflation remains popular at the high end of America’s society.


After WWII, inflation has been a popular short-term market solution for easy money politicians. With the exception of the late 1970’s and early 1980’s, most of the revisionist economists advising Washington have been able to get away with pretty much anything on this front. The US government has changed the calculation for inflation 9 times since 1996, so we’ve pretty much made this popularity-fest permanent.


If you are wealthy and fully invested right now, inflation has to be popular with you. The politicized Federal Reserve is keeping interest rates at an “emergency” rate of ZERO percent, so that the bankers get paid while savers in America pay the bill. We call this the Piggy Banker Spread and the US government underwrites it. At +285bps wide this morning (10-yr yield minus 2-yr), it is within 0.08% of its all-time widest spread ever. Oink, oink.


If you are poor and fully committed right now, inflation is not popular with you. It’s your cost of living. You feel it at the pump. You feel it in your wallet. No matter where you go, there it is. Don’t even try thinking about saving either; you wouldn’t be making any money on those treasury bonds or cash-savings accounts anyway. So you may as well buy yourself another scratch bingo card and hope to live another day; the rest of us will buy iPads.


In the moment, Ben Bernanke is popular amongst many politicians and long-only market participants. Sadly, Greenspan was too. Since Volcker left, Washington has had zero credibility in proactively managing inflation risk.


Most mathematicians understand that the global economic system and the prices born out of it are leading indicators. Bernanke is a historian trapped in his own confirmation bias. If you are in the inflation ‘doesn’t bother my cab ride to work’ camp (only the cab driver’s margins), you won’t agree with this morning’s reality. Inflation is a leading indicator that is marked-to-market every day. Here are some global inflation readings to consider this morning:

  1. After shooting up another +7.8% last week, oil prices are hitting 17 month highs ($85.35/barrel).
  2. After melting up another +5.9% last week, copper prices are hitting 20 month highs ($3.61/lb).
  3. 2-year US Treasury  yields are up +37% in the last month and hitting new highs again this morning at +1.10%
  4. Russian stocks are up again this morning, inflating their petrodollar stock market to +12.1% YTD
  5. Japanese stocks were up again overnight, inflating their currency debased stock market to +7.5% YTD
  6. Turkish inflation for March was reported at +9.6% year-over-year growth

Now if you aren’t living in Istanbul, you probably don’t see the inflation that 73 million people in Turkey do. If you wake-up on Park Avenue and take the US Government’s word for it, you probably don’t see the +18% food inflation that 1.2 billion people in India aren’t paid off to be willfully blind to ignore.


Wall Street is funny and sad altogether this way. While the revisionist historians are getting well versed on the sovereign debt chapters of Reinhart & Rogoff’s “This Time Is Different”, they don’t seem to be spending a whole lot of time getting what will be born out of Piling Debt Upon Debt Upon Debt - INFLATION.


For 7% of the price some of these analytical savants are willing to pay for an iPad, they should buy the book and focus on chapter 12. That’s where the boys show you the risk embedded in Reactive Fiat Currency Management. Inflation is not new. According to the Reinhart & Rogoff data, the 5-year moving average for all countries (for the years 1500 through 2007) is currently breaking out to the upside.


Now you might say that wage inflation in America is low, because in Friday’s hawkish employment report, it was. I have a simple question in response to that – what is a poor person in this country to do then as their wages remain low and everything they buy goes up in price?


I suppose this is why Ben Bernanke is overseeing the highest percentage of Americans living on food stamps since WWII (11%). Almost 1 in 4 American children are forced to eat off that same program. I don’t see any Piggy Bankers eating off those troughs and I doubt Kathleen Norris would write a best-selling romance novel about this either.


Even though we disagree with the conflicted and compromised government calculations, our forecast is that we are going to see a meaningful sequential acceleration in both global and US inflation for the months of March and April.


All the while, the Keynesians at Groupthink Inc. will be parroting what those who never see inflation until it’s too late always do: “This Time Is Different.”


Sadly, there is nothing different about this at all. This is the high-low society that politicians from Moscow to Mumbai have been paid to create as their political powers maintain an explicit mandate to keep inflation popular.


I shorted the SP500 for an immediate term TRADE on Thursday at 1180. My immediate term support and resistance lines are now 1170 and 1182, respectively.


Best of luck out there today,



Inflation Is Popular - pic



The Macau Metro Monitor, April 5th, 2010


CASINO REVENUE UP 57% IN QUARTER South China Morning Post

Macau casino revenue soared to a near-record MOP 13.569BN in March 2010 (a record MOP 13.937BN was set in January 2010), up 42.4% from a year ago and 1.3% higher than February, according to the Macao Daily News. The rebounding economy and robust liquidity on the mainland have fueled VIP gambling volumes, while tourist arrivals rose 15% in the first two months this year. First-quarter casino revenue rose 57.2% from a year ago to MOP 40.91BN, putting Macau on pace to hit a record MOP 160BN this year.



Gaming operator Melco Crown has finally explained why it terminated an agreement to acquire a Macau Peninsula site where it planned to build a casino. “Our decision to terminate the agreement to acquire the Macau Peninsula site was based on our view that Cotai has established itself as the primary location for future development projects,’’ the company said in its annual report, filed on Wednesday. Melco Crown terminated the agreement to purchase the HK$1.5BN site in December 2009. According to an earlier report in the Sydney Morning Herald, the land is owned by companies associated with the third wife of Stanley Ho Hung Sun, Chan Un Chan.


Melco Crown also mentioned it is finalizing a revision to its land lease agreement for City of Dreams that would expand developed gross floor area by ~1.6MM sq ft. so that it may consider adding an apartment hotel tower at CoD.


Finally, Melco Crown states that its agreement with New Cotai to operate the Macau Studio City casino remains in place. However, the company notes that the formal opening of Macau Studio City has not yet been announced and that there are consensus problems amongst the resort developers – eSun Holdings, CapitaLand Integrated Resorts and New Cotai – regarding the development and the timing for the completion of financing.


On the First day of the second quarter, the S&P 500 was higher in an uneventful, pre-holiday trading session.  The biggest tailwind for stocks today was the upbeat and inflationary manufacturing surveys out of China, Japan, the UK, Europe and the US.


As reported Friday morning, payrolls rose 162,000 vs. the 184,000 consensus, while the unemployment rate was unchanged at 9.7%, in line with consensus. The payrolls increase was the largest since March 2007, though temporary 2010 Census hiring boosted the figure by 48,000. Net revisions were +62,000, with February payrolls revised to (14,000) from (36,000), and January revised to +14,000 from (26,000).


Some Hedgeye observations:

  • March unemployment rose to 9.8% (9.7% reported) net of census hiring
  • March employment gain of 162,000 was 114,000 net of temporary census hiring
  • The government continues to overstate the employment numbers

In early 2010, we learned that it’s the government bias to overstate payroll employment levels (to understate employment declines during recessions).  This bias was confirmed by the BLS’s benchmark revision published with the January 2010 employment report.  In January, the BLS had indicated that the underlying assumptions were failing to account for certain job losses.  We will not know the extent to which the government is making up the numbers until the next benchmark revision is published in February 2011 - after the November 2010 elections.


The better-than-expected economic data (and a declining dollar) helped fuel the outperformance on the part of market most leveraged to the REFLATION trade.  The Dollar index declined on Wednesday and Thursday last week and declined 0.47% for the week.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.66) and sell TRADE (82.31). 


With dollar down and commodities up on Thursday, the best performing sector on Friday was Energy (XLE).  Within the XLE, the E&P and oil services stocks led the sector higher.  Both subsectors finished higher every day last week.  The Materials (XLB) was the second best performing sector, with the precious metals stocks were among the best performers on the day.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (82.34) and Sell TRADE  (85.79). 


The Financials (XLF) outperformed by 10bps, with asset managers, life insurers, and guarantors providing the bulk of the outperformance.


The Hedgeye Risk Management models have all nine sectors positive on TRADE and TREND.  On Thursday, Technology (XLK) was a notable underperformer and the only sector to decline on the day. The software group was a notable laggard, with much of the focus on the weakness in MSFT.  The biggest loser was RIMM, which was down after the company missed on February quarter sales and units growth. 


Consumer stocks were higher on the day, but underperformed on a relative basis.  Consumer Discretionary (XLY) slightly outperformed Consumer Staples (XLP) on the back of the strength in Retail and names leveraged to the autos.


The VIX declined slightly on Thursday, down 0.7%.  The Hedgeye Risk Management models have levels for the Volatility Index (VIX) at: buy TRADE (16.32) and sell TRADE (18.01).  We are currently long the VXX.


In early trading, gold is trading higher and stronger economic growth.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,114) and Sell TRADE (1,127).


Copper is trading at a 20-month high as China’s manufacturing expansion and shrinking global inventories helping drive copper higher.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.40) and Sell TRADE (3.67).


In early trading, equity futures are trading above fair value in reaction to encouraging non-farm payrolls data released while the markets were closed Friday, although the unemployment figure muted the impact of the payrolls information.  As we look at today’s set up the range for the S&P 500 is 12 points or 0.7% (1,170) downside and 0.3% (1,182) upside. 


Today's MACRO highlights are:

  • ISM Non-Manf. Composite - March data
  • US Pending Home Sales - February data

Howard Penney

Managing Director













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 80.43%
  • SHORT SIGNALS 78.34%