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Position: Short the S&P 500 via the etf SPY; Long Volatility via the etf VXX.


Tops are processes, not points….  This is how we see the risk management setup for the S&P 500 in 2Q10.


As we move through the balance of April and head into May, we expect stocks to lock in intermediate term highs as bonds break down to lower-highs.  As such, we will be managing risk around the potential for bonds to break down more severely and for the S&P 500 to correct by about 7% in the back half of 2Q10.


Currently, the S&P 500 is in a bullish formation.  A bullish formation occurs when the TRADE, TREND, and TAIL lines of support for a security's price sit below the current price and the longest term duration underpins our intermediate and immediate term durations of price momentum.


Right now we think the best idea is to be long high grade bonds and equities and short high yield!


We have a very healthy degree of skepticism of Government, Politicians and the market’s current levels and we are managing risk accordingly.  As we think about the setup for the S&P 500 over the next three months we observe all the following as headwinds for the market: 


  • Market Sentiment:
    • Volatility is broken on all three durations – TRADE, TREND, and TAIL
    • Institutional Investor survey (weekly) shows one of the widest spreads between “bulls” and “bears” since 2007
    • By early May the “easy compare” of 1Q10 earnings season will be in the rear view  
  • The Economy:
    • Headline CPI accelerated sequentially (month over month) from +2.1% last month to +2.3%
    • The balance sheet of the US is no different than the other P.I.I.G.S.
    • Sovereign debt issues are here to stay
  •  Interest Rates:
    • The April Fed meeting…. “extended and exceptional” is unsustainable and unreasonable; should be removed
    • The high yield market is at levels not seen since 2007; junk and muni issuance are making new highs
    • Treasury yields are scaring the horses out of the barn; the big rate moves (UP) across US history start in the spring and end in the fall
  • Commodities:
    • Oil prices are at levels not seen since Q408 (bullish TREND) and inflationary
    • Copper prices continue to be in a Bullish Formation (bullish TRADE, TREND, and TAIL).
    • Gold has very recently signaled being back to a bullish intermediate term TREND; is the Fed debasing the Dollar again?
  • The Consumer:
    • Consumer and Business confidence is stuck at very low levels
    • Job creation is anemic
    • Mortgage rates are headed higher - mortgage applications were down last week led by a sixth-straight decline in refinancing

Howard Penney
Managing Director



NKE/FL: 'Irrational Magnification'

We want to prep you for what could be some perceived 'irrational magnification' of actual facts unfolding today.



(1)    At least three factories in China have burned down during recent earthquake. These are apparel factories, and should not impact footwear directly. Athletic apparel, however, could be impacted. 

(2)    Athletic Footwear appears fine from a factory standpoint, but timely shipments are being jeopardized by volcano ash and shaky transportation infrastructure.


When I think back over the years of port strikes, earthquakes, and simple product gaffes, I find it amusing how these nuggets race around the market and the stocks move (down) without any real consideration as to what the real impact is. I'm not overly worried about this. Why?


(1)  The factories were apparel. This will impact athletic apparel, but lets remember that there are over 10,000 apparel factories globally.

(2)  I'd be concerned if this was footwear. Those factories are more like cities that self-sustain the global industry. unlike apparel, there are only about 30 factory groups in the world that make footwear. Furthermore, 86% of our footwear is made in China. 

(3) Keep in mind that Nike and Adidas source less than a third of their respective product in China. They're far less exposed than the other brands to any hiccup in China.


Ultimately, the demand is there and the product cycle is there. Could this tweak things by a week here or there, or give an underperforming retailer an excuse to point to? Yeah...I guess. 


But overall, our confidence in our athletic call for 2010 remains quite strong.  We issued a note in conjunction with Keith about FL yesterday and it being near-term overbought. If these anecdotes push the stock lower, it might be a shot to re-engage for those that have watched from the sidelines.


NKE/FL: 'Irrational Magnification' - 4 16 2010 3 16 57 PM



In the Early look on Thursday, we highlighted a glaring disconnect in today’s HIGH-LOW society.  The most obvious example of this is the dichotomy between Wall Street and Main Street. 


Yesterday the S&P 500 hit 1,211 (up 8.7% YTD and 14.6% from the February low) and today the Reuters/University of Michigan Consumer Sentiment Index is at a 5 month low and 6% below where it was in February. 


The Reuters/University of Michigan preliminary April Consumer Sentiment Index fell to 69.5 from a 73.6 in March.  A Bloomberg survey projected the sentiment index would be 75.0. The estimates ranged from 73 to 80, so nobody got it right!


The index of consumer expectations for six months from now, which more closely projects the direction of consumer spending, slumped to 62.3, the weakest reading since March 2009, from 67.9.  As a point of reference, the Consumer Discretionary (XLY) was index was 40% lower in March 2009.


No one can accuse of us on being shy about our views on inflation, but we are not the only observers seeing inflation.  In today consumer confidence report, the survey said they expect an inflation rate of 2.9% over the next 12 months, up from 2.7% last month. 


While the FED and other compromised groups want to look at the “core” inflation rate, the consumer cannot escape the reality they face at the pump and elsewhere. 


We remain confident in our Q2 theme - Inflations V-Bottom!


Howard Penney

Managing Director



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Excerpt From SEC Claim Against Goldman

We are obviously neither lawyers or the judge and jury for the SEC, but we did want to highlight this excerpt from the SEC’s claim against Goldman Sachs and Paulson & Co.:


“GS&Co marketing materials for ABACUS 2007-AC1 – including the term sheet, flip book and offering memorandum for the CDO – all represented that the reference portfolio of RMBS underlying the CDO was selected by ACA Management LLC (“ACA”), a third-party with experience analyzing credit risk in RMBS. Undisclosed in the marketing materials and unbeknownst to investors, a large hedge fund, Paulson & Co. Inc. (“Paulson”), with economic interests directly adverse to investors in the ABACUS 2007-AC1 CDO, played a significant role in the portfolio selection process. After participating in the selection of the reference portfolio, Paulson effectively shorted the RMBS portfolio it helped select by entering into credit default swaps (“CDS”) with GS&Co to buy protection on specific layers of the ABACUS 2007-AC1 capital structure. Given its financial short interest, Paulson had an economic incentive to choose RMBS that it expected to experience credit events in the near future. GS&Co did not disclose Paulson’s adverse economic interests or its role in the portfolio selection process in the term sheet, flip book, offering memorandum or other marketing materials provided to investors...The deal closed on April 26, 2007. Paulson paid GS&Co approximately $15 million for structuring and marketing ABACUS 2007-AC1. By October 24, 2007, 83% of the RMBS in the ABACUS 2007-AC1 portfolio had been downgraded and 17% were on negative watch. By January 29, 2008, 99% of the portfolio had been downgraded. As a result, investors in the ABACUS 2007-AC1 CDO lost over $1 billion. Paulson’s opposite CDS positions yielded a profit of approximately $1 billion for Paulson.”


This obviously reads as very damning and, if accurate, will have implications far beyond a short term correction in the market, which we are seeing today.  A case like this goes to the very reputation of a company, and its future which is based on that reputation, or lack thereof.


Daryl G. Jones
Managing Director

R3: An Update from the Master’s Champ


April 16, 2010





Coming off of Calloway’s big win at the Masters, the company pre-announced its first quarter last night.  At first glance, the results appear to be largely in line with the consensus, although it’s quite possible that expectations were running even higher given more recent, positive commentary on the category in general. 


In looking below the headline results however, there are a few interesting comments:


- Management cited unfavorable weather conditions which had a negative impact on the start to the golf season in many of the company’s key markets as reflected in the 20% decline in rounds played through February according to National Golf Foundation data.  Given the strong sales of seasonal apparel and general merchandise in March across the board, we wonder if this wasn’t a case where the quarter started out sluggish and ended with some renewed strength.  Management did not comment on the monthly trend and did not suggest sales have really picked up.  A more general statement was made saying, “we believe that golf spending will increase as weather conditions improve and the golf season opens.” 


- Perhaps more important than the weather report is management’s commentary on the promotional environment.  Further confirmation was given that inventory levels across retail are healthy and aggressive discounting is now in the past.  This is consistent with early signs of a recovery for the space we saw when DKS reported its 4Q results in early March. 


- Finally, management suggested that the ELY product cycle is favorable, in part buoyed by the success of its pro’s on the Tour.  Thanks again Phil!  However, this optimism was left hanging, with management reiterating that it’s 2Q results will be critical to making full year targets.


- All in, the overall announcement reads like a mixed bag.  Sales momentum appears to have been slightly tempered by weather only to now be helped by recent marketing wins at the pro level.  Clearly business is OK, not great for ELY.  We do wonder with the weather being such a big tailwind to other seasonal categories recently, why it’s not giving management more confidence?   


Eric Levine






- Saks CEO noted that the opportunity to monetize the company’s real estate holdings (i.e NYC flagship store) still exists and but is not something that company is actively looking at. He went on to note that while anything is possible, the monetization of real estate assets or a sale-leaseback is not top of mind or high on the company’s priority list.


- Add Gymboree to the list of companies citing potential negative impact on cost of goods from recent and dramatic increases in cotton prices. While the company has made its commitments to fabrics a long way into the future, it did not that is beginning to see upward pressure from cotton prices in a couple of areas.


- Ann Taylor LOFT threw a party at Manhattan’s hot spot the Bowery Hotel last night to showcase its latest collection/collaboration called LOFT Style Studio. The fall capsule collection is a collaboration with four well known stylists. And while I wasn’t there firsthand to see the goods, I can’t resist sharing this random comment from someone who was interviewed on the scene. “It’s like they want to be J.Crew, but J.Crew is so inspired by other more high fashion things, so by the time you’re inspired by something else inspired, it has this weird watered down effect.”





R3: An Update from the Master’s Champ - Calendar





Sport Supply Group Buyout - Sport Supply Group Inc. is going ahead with the buyout offer from Canada's ONCAP Management Partners LP, the mid-market private equity business of Onex Corp. after failing to win any other binding bids. <sportsonesource.com>


UPS` U.S. Package Volume Grew for the First Time in Two Years - UPS reported that its U.S. domestic daily package volume grew less than 1%. The slight rise was the first year-over-year domestic daily package growth in more than two years. <internetretailer.com>


India Introduces Levy on Raw Cotton Exports - Indian government has been pressured by the domestic textile industry and has recently imposed a punitive duty on raw cotton and cotton waste exports for a period of six months. The decision came after the fact that raw cotton and cotton yarn prices had been hiked by 35% in the last few months, which has impacted the downstream consumers. Exports of raw cotton have been slapped an export duty of Rs 2,500 per ton and shipments of cotton waste attract a levy of 3% of the free-on-board value, while cotton yarn exports are required to be compulsorily registered with Textile Commissioners Office. <fashionnetasia.com>


ITC Establishes Punitive Tariffs on Plastic Retail Bags from Vietnam, Indonesia, and Taiwan - The International Trade Commission cleared the way Thursday for punitive tariffs to be imposed on plastic retail bags from Vietnam, Indonesia and Taiwan in a trade remedy case that could impact industries such as textiles. The ITC, in a 5-to-1 vote, ruled that the domestic industry is being injured by imported plastic bags from Vietnam that are sold in the U.S. for less than fair value and subsidized by the Vietnamese government. According to the ITC, last year, an estimated $43 mm worth of bags were imported from Vietnam, Indonesia shipped an estimated $13.5 mm worth and about $19 mm worth was imported from Taiwan. <wwd.com/business-news>


Chinese Sports and Recreation Sales Rise 13.3% - China’s gross domestic product rose 11.9% in the first quarter, the country’s National Bureau of Statistics reported. The value of production by textile companies rose 21.6%, while retail sales of sports and recreation articles rose 13.3%. <sportsonesource.com>


Store Owners Seeking Premium U.S. Real Estate Wait for `Retailers to Die' - Retailers planning to open stores this year may have difficulty finding space in the most desirable malls and shopping centers, industry executives said. <bloomberg.com/news>


Luxury Industry Set for Mergers, Acquisitions, Stock Listings, Bain Says - The luxury-goods industry may be set for a new wave of mergers, acquisitions and initial public offerings as it recovers from its worst year on record, according to consulting firm Bain & Co.  <bloomberg.com/news>


Skechers Rolls Out First Animated Series at MipTV and More - "Zevo 3," Skechers Entertainment's first animated series for kids ages 6 to 11, was previewed at MipTV in Cannes. Meanwhile, Day 3 saw more presales roll in for Atlantyca, Nickelodeon, Kelencontent and others. Skechers Entertainment's "Zevo 3," 26x22, is scheduled to air this fall on Nicktoons in the U.S. Moonscoop is handling international sales and distribution. The series follows three young teens, who gain super powers when exposed to a compound called Zevo. A licensing program is in the works and master licensees will be named soon, according to Kristen Van Cott, co-executive producer and senior vice president of creative development for Skechers Entertainment.  <licensemag.com>


Callaway Preannounces 11% Sales Growth - Callaway Golf Company said first quarter sales are estimated to rise 11% to $303 million from $272 million for the first quarter of 2009. Earnings per share are estimated to be approximately 24 cents, well ahead of 11 cents earned a year ago. <sportsonesource.com>


Kodiak Footwear Expands More in the US - Iconic Canadian work and outdoor resource Kodiak Group Holdings Co. is celebrating its 100th anniversary this year with an eye toward growing the U.S. business. While the company’s Kodiak brand has been available in the States since the ’80s, according to EVP David McCarthy, a U.S. office was only established in Portland, Tenn. to distribute both the Kodiak and Terra brands in the mid-2000s. As a result of the increased U.S. focus, the company recently expanded its sales force from seven to 20, said McCarthy. And, while he declined to reveal sales figures for business in the U.S., McCarthy said the Cambridge, Ontario-based company plans continued growth here. Fall ’10 will see the launch of Kodiak’s first lifestyle collection under the Heritage name. The series of men’s and women’s styles have a vintage look and is set to retail for $125 to $175. <wwd.com/footwear-news>


Saucony Sprinter Endorsement - Saucony announced Thursday that it signed sprinter Lauryn Williams to a multi-year deal. Williams, 26, is a three-time IAAF World Champion gold medalist in the 100-meter sprint and 4x100-meter relay. Williams competed in the 2004 Athens Olympic games (where she took a silver in the 100-meter) and in the 2008 Beijing games. Under the terms of the deal, a biannual grant in Williams’ name will be awarded to support track-and-field programs for girls as part of Saucony’s Run for Good Foundation, which targets childhood obesity. Lexington, Mass.-based Saucony is a division of Topeka, Kansas-based Collective Brands Inc. <wwd.com/footwear-news>


Airwalk’s First Endorsement - Englewood, Colo.-based Collective Licensing (also a division of Collective Brands Inc.) announced Thursday an addition to its roster, signing freestyle motocross athlete Ronnie Renner as the Airwalk brand’s first athlete in the field. Renner, 32, took gold in last year’s X-Games Step-Up and has appeared in shows on MTV and Fuel TV. <wwd.com/footwear-news>


All-American Running Back Drafted by Adidas - In anticipation of the 2010 NFL Draft, Portland, Ore.-based Adidas said it signed a multi-year agreement with C.J. Spiller, an All-American running back from Clemson University. Spiller was widely expected to be a top prospect in the draft. Under terms of the deal, Spiller will be involved in product development for the football and training footwear and apparel programs, and will appear as a face of the Adidas football program in marketing efforts. Spiller, also a three-time All-American in track, is one of only two college players in history to notch 3,000 rushing yards, 1,500 kickoff return yards, 1,000 receiving yards and 500 punt returns yards (the other is Adidas labelmate Reggie Bush). Spiller set more than 30 school and conference records. <wwd.com/footwear-news>


Mattel Posts Surprise First-Quarter Profit as Sales Beat Analyst Estimates - Mattel Inc., the world’s largest toymaker, posted an unexpected profit in the first quarter on sales of Toy Story and World Wrestling Entertainment action figures and games. <bloomberg.com/news>


MasterCard Launches A Payments Lab that Could Boost Its Online Offerings - MasterCard Worldwide today said it has established a research and development arm. The unit could boost the payment card network’s offerings for online retail payments. <internetretailer.com>


Jamba Juice Debuts Branded Apparel - Licensee Headline Entertainment has rolled out the first line of Jamba Juice-branded apparel at mass and specialty retailers, as well as online. A separate launch will follow this summer at Jamba Juice stores. The apparel line ($12 to $22) includes T-shirts, a hooded sweatshirt, canvas tote bag and two different style hats for men, women and kids. <licensemag.com>


Prosperity's Volcano

"The first panacea for a mismanaged nation is inflation of the currency; the second is war.  Both bring a temporary prosperity; both bring a permanent ruin.  But both are the refuge of political and economic opportunists."
-Ernest Hemingway


As the wanna be Maestro Ministers of European finance descend on the capital of Spain today, remember one thing: European politicians take long lunches and long naps. These guys are in it for their own temporary prosperity. Their proactively predictable plan coming out of Madrid will be to Pile Debt Upon Debt Upon Debt. That is going to bring a permanent ruin to the already high-low society that they perpetuate.


From Argentina to Greece this morning, countries who have lived their lives in serial default are going to tell you “it’s different this time.” That’s what liars and/or people who don’t know what they don’t know about history do. Always remember: markets don’t lie; politicians do.


Reinhart & Rogoff’s latest compilation of 8 centuries of inflation and currency data would agree – “This Time Is Different” – in only that this time we are going to light up this global bonfire of fiat currencies from Athens to Bangkok. That volcano in Iceland is nothing compared to what’s coming down this financial system’s pike.


While some might choose to forget that Argentina defaulted on a cool $95 Billion in 2001… and some may choose to ignore that stocks in Thailand have dropped -9.4% since April the 7th … and some may claim these aren’t facts that will affect the collective geopolitical risk that we Hedgeyes call interconnectedness… that doesn’t mean these realities cease to exist. The hot magma of global sovereign debt risk is beginning to bubble.


Like the Bear Stearns story of May 2008, when soothsayers named Blankfein, Bernanke, and Fuld said the storms of debt obligations hath passed, Greece is a metaphor that risk managers in May of 2010 better not choose to ignore.


Funding long term liabilities with short term marked-to-model government paper didn’t work then, and it won’t work now. Borrowing short allows the gasses of inflation that lie below the belts of political crust smell like what they are. Everyone in this risk management room knows the stench.


On that cheery Friday note, allow me to introduce the Return of the Hedgeye and our Q2 Macro Themes for 2010 (we will be hosting a conference call for our subscribers at 11AM EST):

  1. Sovereign Debt Dichotomy – As sovereign debt issues accelerate, we expect to see a dichotomy develop between the winners and losers.  The equity and currencies markets of these countries will react accordingly, with a number of investment opportunities on both the long and short side.
  2. Inflation’s V-Bottom – We continue to see a reacceleration in inflation that is currently not priced into interest rates, or broad prices.  We will be also introducing our proprietary Hedgeye Inflation Index on our conference call this morning.
  3. April Flowers / May Showers – In an inverse of the cute expression, we are expecting the spike in the U.S. stock market from April to come back down to earth.  We are not calling for a crash, but a proactively manageable correction. We will outline 15 reasons as to why we think the SP500 is a short going into May.

As is customary for our Macro team’s presentations, we have inside of 3 dozen glossy slides that would make Fed doves like Janet Yellen and Bill Dudley cry. Our goal is not to be alarmists, but to continue to protect you and your families from the sinews of our conflicted and compromised government forecasting processes like we did in 2008.


My immediate term support and resistance levels for the SP500 are 1195 and 2014, respectively. We shorted the SP500 yesterday and bought volatility. If you’d like to participate in our conference call, please email . We will have a full Q&A session that doesn’t have the shackles of sell side compliance people who need to protect their conflicted investment banking and brokerage business machines. This is all about real-time research, all of the time.


Best of luck out there today and have a great weekend,



Prosperity's Volcano - Thai SET



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