“The object of golf is not just to win. It is to play like a gentleman, and win.”

-Phil Mickelson


It’s hard not to like the storyline coming out of Augusta, Ga. on Sunday and the Drudge Report having a picture of Tiger Wood with the caption “WHATEVER.”  It’s hard not to like the storyline the market is telling either.  That being said, due for release on Wednesday, April 14th, the March 2010 CPI should show inflation accelerating, thanks to higher oil and gasoline prices, as well as to the slowly spreading broad impact of higher energy costs.  A gambling man would favor something on the plus-side of consensus expectations. 


Looking at last Friday - there we have it the steady pattern of daily higher-lows and higher-highs continues; the S&P 500 finished higher on Friday by 0.67%.  Friday’s MACRO tailwind was the better than expected wholesale inventories data, while the news concerning Greece seems to be mere distraction.  For the 6th day in a row all sectors are positive on TRADE and TREND, and all sectors closed higher on the day.


February wholesale inventories are better than expected up 0.6% vs. consensus at 0.4%. The inventories data provided more support for the idea that the economy is getting stronger. The January Wholesale Inventories number was revised to +0.1% from (0.2%).  The February Inventories/Sales ratio was 1.16; same as last month and lower than the year-ago reading of  1.38.


Today, Greece continues to generate headlines as Euro-region politicians said yesterday they would bail out Greece to the tune of $41 billion in loans; Greece is up 5% on the news. 


Last week, the best performing sectors were Financials (XLF), Consumer Discretionary (XLY) and Energy (XLE).  The XLE was the best performing sector on Friday.  Dollar weakness provided some support for the REFLATION trade as oil fell 0.55% on the day.  Chevron and ExxonMobil provided leadership, with the S&P 500 coal index up 1.2%.  Despite a weaker dollar, Materials (XLB) was the worst performing sector on the day. AA was down 3.2% after a downgrade by JPM ahead of earnings on Monday.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (80.68) and sell Trade (81.77).


The Hedgeye Risk Management models have levels for the VIX is: buy Trade (15.84) and sell Trade (17.42).


In early trading, crude oil is looking higher on strong demand from China and a weaker dollar.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (82.69) and Sell Trade (87.63). 


In early trading gold is trading at a 4 month high.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,131) and Sell Trade (1,169).


The river card on the move in copper is in! Copper is trading at the highest level since the collapse of Lehman Brothers in September 2008; Imports of copper and products by China were 456,240 tons last month vs. 322,280 tons in February (up 42%) and 22% more than in March 2009.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.54) and Sell Trade (3.63).


In early trading, equity futures are trading above fair value as markets react positively to news of an EU support package for Greece.  Today's MACRO data points are light, but Alcoa kicks off the Q2 reporting season after the close.  As we look at today’s set up the range for the S&P 500 is 17 points or 1.1% (1,181) downside and 0.3% (1,198) upside. 


Howard Penney

Managing Director












The Week Ahead

The Economic Data calendar for the week of the 12th of April through the 16th of April is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2

Footwear: Positive Anecdotes Out of Jakarta

Indonesia is noting an uptick in orders – both cyclically and with new long-term capital projects. Political posturing? Perhaps. But the rationale makes sense.


Here are some important takeaways from a senior executive from the Indonesian Footwear Association.



1) Footwear exports ($2bn vs. $140bn total exports) are trending up 11% this year. That should accelerate as the current factory build plan has accelerated due to pressure from the major brands and retailers to move production on the margin outside of China.

2) Adidas and Nike have increased their orders to local manufacturers.


3) Production of New Balance shoes will increase from 50,000 pairs last year to 500,000 pairs by the end of this year and would eventually reach 1 million pairs per annum next year.  Why is this one particularly noteworthy? New Balance has been known forever as the “made in the USA” footwear company. An incremental shift to Asia will help it be more price competitive. 1mm pair is not a game changer on a base of what we estimate to be 30-35mm pair for New Balance. But let's watch it.


Overall, any evidence of a shift away from China in this industry is good...given that 86% of the shoes on our feet originate in China.

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PVH: The Risk That No One Talks About

PVH: The Risk That No One Talks About


PVH has its cookie jar of special charges to make the Tommy deal fuel EPS. But does anyone care that this is the merger of the two companies in retail with the greatest and fattest-tailed off-balance sheet compensation liabilities for two individuals that have proven risqué, to say the least?


You gotta love the raging love PVH is getting in the wake of its Tommy acquisition. Several upgrades, Cramer pounding the table... and that’s AFTER a 55% move in the stock (3x retail peers) since the deal was first rumored. I guess I should probably mention that this price is roughly 2x the EV where TOM was taken out back in 2005.

The deal will be accretive immediately per management with about $1.00 in incremental EPS over the next year. But that’s if we exclude about $1.00 in special charges. Huh?  In my language, that’s not immediately accretive.


I’m not here to drag this deal through the mud. In fact, it does make a fair amount of sense from PVH’s perspective, and Tommy is actually a far better brand globally than most people in the US think. But there are underlying risks to NewCo that should at least be considered, and they’re not all apparent on financial statements.


The crux of it revolves around taking brands that are based on two individuals that license their respective names to a company. It’s notable enough to have one such individual in Calvin – remember when he was ejected from a Knicks game in ’03 after interfering with a Spreewell inbound pass? But then adding Tommy to the cocktail? Remember that this is a guy that got into a fistfight with Axl Rose at a nightclub a couple years back.  We can have fun with the tabloid facts and You Tube videos, but let’s simply revert to the financials. That’s where I’m most comfortable.


Consider the following…

  • PVH identified about $1.55bn in forward obligations in its 10K. But this excludes another $575mm in payments required to be distributed to Mr. Klein under the original terms of the purchase agreement. The kicker is that this lasts until 2017, and is at a rate of 1.15% of worldwide net sales of products bearing the Calvin Klein name. When I add it all up, the CK payments are actually greater than the operating lease liabilities - which represent the greatest off balance sheet liability for most other companies in the retail supply chain.
  • It’s tougher to get current information on Tommy. But the long-standing agreement he’s had is for a base of $900,000 each year base plus 1.5% of the net sales over $48,333,333. Keep in mind that this is a company with a revenue run-rate near $2bn. They have tweaked the agreement along the way to not include certain businesses to give his comp the appearance of being less egregious. But do the math…it’s scary.

When I net it all out, PVH/TOM has forward compensation obligations that are greater than any other off-balance sheet liability, and they are headed up over time. Liabilities should go down over time, not up. The only way PVH/TOM’s go down is if revenue goes down. That’s not a very good option either. 

Expectations are high in this name, and the company has enough to snack on in its cookie jar of special charges that earnings will be fine for at least a couple of quarters. For now, I view this as a ‘do nothing’ stock.

But given the underappreciated off-balance sheet/financial risk, let’s hope that the board is keeping them away from sporting events, rock stars, and other crowded places.


PVH: The Risk That No One Talks About - axl


PVH: The Risk That No One Talks About - ck


Germany’s Export Push

Position: Long Germany (EWG); Short Euro (FXE)


We got a bullish export report (though lagging) from Germany today, with exports up +5.1% in February month-over-month. The chart below shows an improving trend in exports, up +9.4% in February Y/Y, with favorable comparisons for the months ahead as global demand continues to melt higher.  We bought Germany via the etf EWG in our model portfolio on 4/7/10 to take advantage of the strength we see ahead.


As we’ve highlighted in our recent work, Germany fits one of our investment themes of owning High Grade versus High Debt.  And recent fundamental data helps confirm our bullish bias on Europe’s largest economy:

  • German Factory Orders, released earlier in the week, came in at +24.5% in Feb. Y/Y; while certainly a moonshot of a number, we noted the comparison was off the trough a year earlier, yet orders are confirming an intermediate positive trend.
  • The trend has improved in German Manufacturing and Services PMI surveys over recent months.
  • The country’s inflationary environment continues to favor consumers and producers, with CPI at +1.1% in Mar. Y/Y and PPI at -2.9% in Feb. Y/Y.

To take advantage of present weakness in the Euro due to the sovereign debt issues associated with the PIIGS, we remain short the EUR versus the USD via FXE. The anchor of our bullish case for Germany remains the fiscal conservatism of German Chancellor Angela Merkel and her government. You’ll remember that she initially supported a unilateral IMF-led campaign to bailout Greece to prevent paying for Greece’s debt out of German coffers, and at her command the government has maintained budget deficit and federal debt at a level far lower than her European peers (see our portal for more information). As countries (globally) further extend their debt obligations, Germany will be our lower beta play on safety, underpinned by improving fundaments.


Matthew Hedrick



Germany’s Export Push - Deutschland


R3: Keep the Beemer, Risk the House


April 9, 2010





It’s obvious that a confluence of half-dozen factors came together to drive yesterday’s solid results. But consider the underlying change in behavior around mortgage defaults. A recent study raises some good points that we think could explain away $67bn in annual PCE.


If there’s one head-scratcher that came from yesterday’s strong sales numbers, it is the extent to which the consumer is actually improving, and what underlying factors are really driving higher retail sales.  Was the 9% comp (highest in 11 years) due to a) higher tax refunds, b) holiday shift, c) weather, d) penned up demand as consumers had not bought Spring apparel in 23 months, e) a wealth effect from higher equity prices, or simply f) a rebound in the economy. My sense is that we can spend all week trying to quantify precisely how much of these factors are contributing to sales strength (which we are doing, by the way). But there’s another theory that Allison Kaptur on Josh Steiner’s Financials team brought to my attention this morning that is tough to ignore.


It is from an article written by Paul Jackson of The crux of the argument is that consumers who are either in default – or on the brink -- are simply spending their mortgage payments on something other than their home. He states the following…

  • “We’ve got 7.4 million non-current loans in this country, according to data source Lender Processing Services, Inc.”
  • “The average age of a loan in foreclosure is now 410 days delinquent, after all, according to LPS; and that’s just the average. Many delinquent borrowers are able to stay in their homes for even longer than that.”
  • Data is clear that “Americans are now more likely to stop paying their mortgage first relative to other debts, meaning that they will continue to pay their credit cards, auto leases and other financial commitments.”

While this is purely anecdotal, Jackson highlights a HAMPlicant case study whereby the applicant had an $1,880 monthly payment on their mortgage they’d defaulted on, yet their bank statements for the past 30 days included the following expenses:

  • visits to the tanning salon
  • visits to the nail spa
  • some kind of gourmet produce market
  • various liquor stores
  • A DirecTV bill that involved some serious premium programming or pay-per-view events
  • Over $1,700 in retail purchases, including: Best Buy, Baby Gap, Brookstone, Old Navy, Bed, Bath & Beyond, Home Depot, Macy’s, Pac Sun, Urban Outfitters, Sears, Staples, and Footlocker

If just half of the current 7.4 million currently delinquent mortgages are ‘spending their mortgage’ and we assume a $1,500 average monthly mortgage payment – we get about $67bn in higher annualized discretionary spend – or about 1.4% growth.


-Brian McGough




  • Pier One is one of the most successful large retail chains at negotiating rent rate reductions. Over the past two years, the company has successfully reduced rents on 350 stores (over 1/3 of the chain) resulting in an average reduction in rates of 23%. Management still believes there is opportunity for additional stores to be adjusted. Over 2009, the savings resulted in a $6 million improvement in SG&A and $10 million in cash savings.


  • A study released by Kline and Company suggests that sales nail polish are coming off a banner year, despite the historical view that lipstick sales benefit when the economy suffers. The “lipstick theory” was based on the idea that women will spend on lipstick as a way to improve their appearance given the low price point of the product. With overall cosmetic sales down 0.8% for 2009, nail polish bucked the trend with a 14.3% increase. The new “nail polish theory” suggests that women have curtailed spending on manicures in favor of doing their own. Oddly, lipstick sales were down 5.3% last year, suggesting there was some sort of trade-off between the two categories.


  • Cult favorite Brazilian flip-flop maker has entered the market for traditional footwear. Havianas recently launched a small collection of sneakers and espadrilles at Harrods in London. It’s still too early to know when the moderately priced ($55/pair) footwear will make its way stateside.





R3: Keep the Beemer, Risk the House - Calendar 





Consumers to Aid U.S. Economic Rebound as Unemployment Drops, Survey Shows - Consumers are emerging from a two- year hibernation to play a more active role in the U.S. recovery as unemployment recedes, according to economists surveyed by Bloomberg News. <>


Consumers Praise Private Label Brands - Respondents to a 23-country survey largely agreed that store brands are at least as good as national brands in many respects. Released yesterday by Ipsos Marketing the Consumer Goods poll (conducted last November through this January) found 89% of respondents saying store brands are "the same as or better than" national brands when it comes to "providing a good value for the money." But it's not just that they're seen as a bargain. Large majorities of respondent also said store brands are at least the equal of national brands in "offering products that meet my needs" (87%), "offering products that are good for the family" (86%), "offering food products that taste good" (81%) and "offering home products that work well" (81%). <>


UK Fashion Industry Calls for Clarity on Party Policies as Election Approaches - Fashion industry leaders have called for the three main political parties to clarify their plans to stabilise the economy and consumer confidence and give transparent information on issues such as National Insurance (NI), VAT and business rates ahead of the general election on May 6. <>


India: Government Cancels Yarn Export Duty Concessions - Indian government has withdrawn the 7.61% concession of cotton yarn exports under the Duty Entitlement Pass Book (DEPB) scheme to control prices of textile products.  Knitwear exporters have been protesting against the unusual hike in cotton yarn prices, which have increased by nearly 30% in the last few months, while garment exporters have been badly hit by the slowdown in global markets. <>


R3: Keep the Beemer, Risk the House - cotton


EU: Euro-Zone Retail Dipped in February - Retail sales in the 16 countries of the Euro-Zone fell once again in February, indicating that consumer spending will remain weak due to a slow economic recovery, according to the European Union's statistics agency Eurostat. The retail sales figure dropped by 0.6% from the previous month unexpectedly. That was the second straight drop this year and undermines hopes that the eurozone economy is poised for a solid return to growth in the first quarter of 2010 after stagnating in the last three months of 2009. <>


China Signs Free Trade with Costa Rica - China has signed a free trade agreement (FTA) with Costa Rica, paving the way to lift almost all tariffs on Chinese textiles, chemicals and machinery to the Central American nation. When the agreement takes effect, 90% of commodities will be tariff free within a few years. China is Costa Rica's second biggest commercial partner after the United States, while Costa Rica is the Asian nation's ninth largest trade partner in Latin America. <>


Seven & I, Fast Retailing Rise After Forecasting Higher Earnings on Demand - Seven & I Holdings Co. and Fast Retailing Co., Japan’s biggest retailers by market value, advanced in Tokyo trading after forecasting higher earnings amid signs consumer spending is recovering.  <>


J. Crew to introduce Warehouse Collaboration - J. Crew will have something to offer the most diehard of denim aficionados next month. The retailer has collaborated with Japanese selvedge denim label Warehouse on an exclusive men’s style that will sell for $300 on its Web site, and at its Men’s Shop and Liquor Store locations here. The style’s name, Lot 484 jean by Warehouse for J. Crew, is a nod to the address of the Men’s Shop at 484 Broadway. <>


The iPad Impact - With its sleek design and game-changing visual capabilities, Apple’s newly released iPad could be just what the fashion industry always wanted. “The screen real estate is perfect for what we do,” said Jag Bath, VP of product management for Gilt Groupe, which launched an iPad app last week, in the days leading up to the device’s debut on April 3. Other companies seem to be enjoying the benefits as well. Both eBay and Gap launched apps earlier this month, as did several fashion magazines, including Interview and GQ. <>


R3: Keep the Beemer, Risk the House - ipad


Timberland Is a Little Greener - The Timberland Company announced that it has achieved a significant reduction of greenhouse gas emissions. The company successfully reduced its emissions by 36% in 2009 over its 2006 baseline coming from Timberland owned and operated facilities and employee air travel. Timberland is on pace to reach its goal of a 50% emissions reduction by the end of 2010. <>


Cotton Inc. Unveils New Ads - Cotton Incorporated is looking to link consumers’ associations to cotton with high fashion in the next evolution of its “The Fabric of My Life” campaign. The original Fabric of Our Lives campaign from the Nineties was successful in getting consumers to recognize how cotton was a crucial and desirable fiber in everything from socks to jeans to towels. For the last several years, the message has shifted to presenting cotton as a fiber equally suited to designer apparel. <>

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