Off Price Retail: Gourmet Salami

Flash-fashion retailer Gilt Group has resorted to selling capicola and salami. No Joke. This shows 1) the lack of scalability of this model in a singular category, and 2) difficulty in finding higher-end apparel for off-price channels (ROST and TJX).




In what is either a sign of the apocalypse, or just an indication that these ‘internet luxury auction models’ are simply not scalable, off-price flash sale retailer Gilt Group offered cured meats on Monday. Yes, we’re talking gourmet salamis. This plays right into the biggest challenge for these businesses – which is the consistent depth/breath of goods. That’s why we’ve seen these forums evolve into other categories like travel. But capicola? C’mon…


Interestingly, this non-apparel offering coincides with other anecdotes we’ve come across suggesting that higher-end off-pricers are having trouble sourcing goods. The luxury players that were happy to sell inventory into the online channel, are now reverting back to their old Saks, Neiman, and Barney’s ways.


Off Price Retail: Gourmet Salami - GourmetSausage


Companies in PE crosshairs have been leading the way over the past week.


On March 17th, I wrote about a selection of companies that could be on the “A” list for a private equity transaction: CAKE, PFCB, MSSR, TXRH, BOBE, EAT, CHUX, RRGB, PEET, and CPKI.  CKR was already, by then, being targeted by parties interested in acquiring the chain.  In the past week, restaurant stocks have been performing strongly.  As the rumor mill has gained steam, and CPKI has confirmed that the firm has hired Moelis & Company to explore financial and strategic alternatives.  The chart below illustrates clearly that the “A” list, plus CKR, has strongly outperformed over the past week. 


TALES OF THE TAPE - alist413


In terms of upgrades/downgrades, CAKE was moved from “conviction buy” to “buy”.  Estimates were lowered at PFCB based on the unfavorable impact of winter weather in February, calendar shifts, and near-term pressure from promotions and product enhancements.  PFCB's shares are still rated “outperform”, however.  YUM and KKD are reporting this week.  As can be seen in the table below, KKD has been strongly outperforming its peers.


TALES OF THE TAPE - stcok 413


TALES OF THE TAPE - commod 413


Howard Penney

Managing Director


“I do not want Fannie and Freddie to be just another bank… I do not want the same kind of focus on safety and soundness.”

-Barney Frank (September 25, 2003)


In his recently released “The End of Wall Street”, Roger Lowenstein kicks off a chapter titled, “To The Crossroads” with that quote from the House of American Perceived Wisdoms. As we try to figure out where the US stock market goes after a +76.9% rally, we should always remember that Congress helped create a massive hole in America’s balance sheet that the Chinese will never forget.


When President Obama asked China’s President Hu Jintao for a “more market oriented rate” yesterday in Washington, one has to wonder if that smile on Hu’s face was kindly asking the President of the United States ‘are you kidding me?’


In the face of the US Government marking the rate of return on Fed funds at ZERO percent, telling the Chinese to mark-to-market is the height of hypocrisy. Sure, the Chinese have their own accounting issues, but so do we, and it’s about time our President recognizes this as fact. This has nothing to do with China’s LGFV’s (Local Government Financing Vehicles). This has everything to do with America marking US government deficits and liabilities to model.


Now that Congress is back in session, if you want to see Barney Frank, Tim Geithner, and Ben Bernanke do the collective squirm, have your local Congressman ask any of them if GSE debt (Fannie and Freddie) is sovereign debt? Simple question; simple answer. Not unlike a low quality company that tries to keep their sordid secrets off-balance sheet, this is exactly what America has signed off on letting our politicians of the Bubble in American Politics do – it’s called marked-to-model.


GSE debt is backed by the US government and is, therefore, sovereign debt. You don’t have to take my word for it. Ask our largest creditor what they think. If it quacks and swims in a circle, it’s a one-legged duck.


Some “free marketers” of the Reagan revival will quickly come to the rescue of the US Treasury market and pronounce their proclamation of faith that Treasuries trade in a liquid market and are therefore trading marked-to-market. That’s all good, fine (and theoretical) and, to a degree I might actually agree with part of that argument if you push me out long enough on the curve. But reality is that the Fed Funds Rate is keeping the short end of the curve artificially depressed (or marked-to-model).


So my simpleton suggestion this morning is that we take a good hard long look in the mirror before we start trumpeting our once vaunted system of American Capitalism and see this for what it has become. Greece getting a short term bailout by European government officials who decided to mark Greek debt 200 basis points under the marked-to-market rate is simply a roadmap to our very own perdition.


Funding long term debt obligations by borrowing short on a conflicted and compromised government rate is the opposite of what we should have learned from the last 24 months of this mess. These American and Western European politicians aren’t doing anything different right now with sovereign debts than what Bernanke and Paulson attempted to have Wall Street bankers do in the early stages of 2008. It’s pathetic.


We can’t do this for much longer or the Chinese and Japanese are going to start doing exactly what we taught them to do, which is get out when something smells like it’s going down the path of a debt spiral. While hope is not an investment process, I can only pray that they don’t start doing this aggressively any time soon.


China has been a net seller of Treasuries for the past 3 months. This doesn’t include the March data, and in the month of March we saw a ton of Treasury selling on the short end of curve (2-year yields went from 0.8% at the beginning of March to 1.1% in a straight line = +37.5%). Can you imagine where interest rates would be if President Obama heeded his own advice and marked the Fed Funds rate at a “more market oriented rate”?


The Piggy Banker Spread is 10 basis points (0.10%) off its record wide levels in America. Again, the government’s choice has been to bailout financiers who need to borrow short to attempt to invest long, and that is what it is. Who underwrites this spread? You do. You don’t get the savings rates of return that Chinese, Australian and Brazilian citizens do because the ideology of the Greenspan and Bernanke Feds continues to be marking your savings rate to model, below the level of inflation.


Below the level of inflation? Yes. Expected inflation is one of the main drivers the long end of the Treasury curve in the last month. You see, the further you push out on the curve, the further away you get from the Fed’s marks. That’s why the yield spread (Piggy Banker Spread) between 10-year and 2-year rates is +282 basis points wide this morning.


Both the long end of the Treasury market and the US Dollar are marked-to-market more appropriately than the short end – Bernanke has politicized that just like Greenspan did. Meanwhile, both Mr. Currency and Mr. Bond Market see the inflation that will be reported here in the USA tomorrow, however compromised and conflicted that government calculation may be.


My immediate term support and resistance levels for the SP500 are now 1184 and 1201, respectively. If this note read as angry, it should have. Re-reading Lowenstein’s account of what caused this mess has reminded me of my greatest fear. With the stock market back up, we may have learned nothing.


Best of luck out there today,



Marked-To-Model - OBAMA


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The Macau Metro Monitor, April 13th, 2010



According to a survey carried out by universities in the region, consumer confidence in mainland China, Hong Kong and Macau fell QoQ to 92.3, 88.1 and 82.8, respectively. Macau's decline of 4.7% was the most of the group. The index uses a scale of 0 (representing no confidence) to 200 (complete confidence) to represent ascending levels of consumer confidence. Scores below 100 suggest people are lacking adequate confidence while scores above 100 reflect good confidence. 


The drop in the overall consumer confidence in mainland China, Hong Kong and Macau was mainly due to the record low sentiment about prospects in the housing market. In this category, Macau recorded the steepest decline of 15.3%, to 37.6, while sentiment in Hong Kong and mainland China was down 12.4% (to 58.1) and 7.8% (to 62.9), respectively.





Macau focused real estate investment company, Speymill Macau Property, has reached sale agreements for almost all the 259 apartment units the company owns in The Riviera, a two tower residential development on the Inner Harbour area, formerly known as Lorcha. The company owns a total amount of 270,951 square feet in the development, of which 231,291 sq ft were under contract as of 4/12/2010, leaving a total of 39,660 sq ft remaining to be sold. The company owns 145 units of 296 units in Tower 1 and 114 units of 222 units in Tower 2 of Riviera. The average price of the units sold in Tower 1 was HK$3,568 per square foot.The average price of the units sold in Tower 2 was HK$3,581 per square foot. The estimated total net revenue from such sales will amount to approximately HK$796MM, according to Speymill.



The Labuan Chamber of Commerce (LCC) would like a casino to boost its tourism industry. LCC chairman Datuk Francis Tee Chee Hok told the Daily Express, "A casino could be the answer and it is also compatible with Labuan's status as a free port". Aware of the government's stand of not favoring the issuance of new casino permits, Tee said the proposed Labuan casino could be an extension of the Genting Highlands casino.He suggested that the casino could be in the form of a floating ship, departing from the island at 6pm and returning at 6am with strict checks to prevent the wrong people from patronizing it.


The S&P 500 finished slightly higher (+0.18%) in mixed trading on Monday - volume was anemic and the advance/decline number was down significantly.   The trend of waning upside momentum continues; the unknown is how long it will be before that matters.


On the MACRO front, the biggest tailwind for stocks comes from the EU finance minister’s details of a funding package for Greece, though ongoing concerns remain.  In addition, M&A activity and deal speculation are contributing to the froth, as Bloomberg reported that US companies have announced more than $272 billion in M&A activity, up from $213 billion last year.


Yesterday, CPKI confirmed that it is reviewing strategic alternatives, UAL Corp and US Air continued to move higher after the WSJ reported that talks between the two airlines have become "very serious", and shares of PALM surged on the back reports that the company has put itself up for sale. 


The best performing sector yesterday was the Financials (XLF).  The KBW Bank Index was up 4.7% over that last week, and extended its outperformance by 100bps yesterday.  Some of the regional names were notable gainers, while C was the standout among the money-center banks.  For the Financials, the Q1 earnings season is expected to have a positive tone to it. 


The Dollar Index was down 0.65% yesterday and 1.19% over the past two days.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy TRADE (80.48) and sell TRADE (81.82).


Ahead of the AA earnings the Materials (XLB) was the worst performing sector on the day.  AA reported disappointing revenue numbers, showing that the end markets are not consistent with 5.6% real GDP.  Yesterday the RISK/RECOVERY trade also got a boost from the VIX being down 3.5%.  The Hedgeye Risk Management models have levels for the VIX at: buy TRADE (15.45) and sell TRADE (17.30).


In early trading, Oil is trading down for a fifth day in a row as we are looking at forecasts of an 11th consecutive weekly gain in U.S. crude inventories.  U.S. inventories of crude oil probably rose 1.15 million barrels as imports climbed, according to a Bloomberg News survey. It would be the longest stretch of increases in five years.  The Hedgeye Risk Management models have the following levels for OIL – Buy TRADE (82.84) and Sell TRADE (85.28). 


In early trading gold is trading lower, as the dollar is looking higher.  The Hedgeye Risk Management models have the following levels for GOLD – Buy TRADE (1,136) and Sell TRADE (1,173).


Copper fell for a second day in London on concern that prices at the highest level in more than 20 months maybe too high too fast.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy TRADE (3.46) and Sell TRADE (3.63).


In early trading, equity futures are trading below fair value after Alcoa's revenues missed consensus.  As we look at today’s set up the range for the S&P 500 is 17 points or 1.0% (1,184) downside and 0.4% (1,201) upside. 


On the MACRO calendar today:

  • March NFIB Small Business Optimism Index
  • February Trade Balance
  • March Import Prices
  • APR IBD/TIPP Economic Optimism Index
  • ABC Consumer Confidence


Howard Penney

Managing Director













Approval Down, Market Up

A few months ago, we wrote that we expected a bounce in President Obama’s approval rating.  While his approval ratings have fluctuated based on the Rasmussen Daily Tracking poll – a is poll that we have consistently focused on due to Rasmussen’s recent accuracy in calling Presidential elections – the more widely accepted Gallup Poll tells a more sobering tale. In that poll, President Obama’s approval rating has been in a directly downwards trajectory.


Since January of this year, President Obama’s approval rating on the Gallup presidential job approval rating has fluctuated between 47 – 51%.  On a shorter term basis, President Obama’s approval rating is at 45% and his disapproval rating is at 48% on a three day average basis.  Both of these are the worst approval ratings of his Presidency.


Below we have charted the stock market versus President Obama’s approval rating on a year to date basis.  While there is not a clear correlation, it is clear that President Obama’s declining approval rating has not had an adverse impact on the stock market, which has powered higher despite a continued lower shift in Obama’s approval.


We have written on this in the past, but, interestingly, negative Presidential approval is actually more positive for stock market returns.  In fact, according to a study by Ned Davis Research, which was summarized in Slate magazine, from 1960 through 2006:


“Stocks did better when presidents were doing poorly, and they did worse when presidents were more popular. In the weeks when the presidential approval rating was below 50 percent, stocks rose at an annualized rate of 9.2 percent. In weeks when the approval rating was between 50 and 65 percent, the Dow rose at an annualized rate of 5.4 percent. And in those periods when approval ratings were above 65 percent (about one-fifth of the time), the Dow rose at a 2.6 percent annual rate.”


The interesting caveat is that when Presidential Approval gets really bad, the stock market underperforms.  According to the same report:


“When presidential approval ratings sink below 38 percent, which they have only 7.2 percent of the time since 1959 (Bush stands at 37 percent in the current Gallup Poll). During such periods of "extreme low ratings, the Dow falls at a 2 percent annual rate.”


While President Obama’s approval is but one factor when thinking about stock market performance, it is not necessarily a negative one.


Daryl G. Jones

Managing Director


Approval Down, Market Up - Obama S P 500

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%
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