German PMI and the Weight of Gravity

Position: Long Germany (EWG); Short Spain (EWP), Short Euro (FXE)


As a leading indicator, the Purchase Managers Index (PMI) is one critical data point we use in our fundamental analysis. While our bullish call on Germany remains (see our portal for recent analysis), we’re acutely aware that ‘gravity’ could prevent this number from improving over the coming months. 


Below we’ve pulled back a chart of German PMI over the last eight years and overlaid the DAX. There are two major call-outs:


(1.)  We’re now above the 60 level, a critical threshold for the Manufacturing PMI (the most current reading in April is 61.5 versus 60.2 in March).

(2.)  The change in the second derivative from March PMI to April slowed compared to previous months, an early sign that may suggest the expedited move since early 2009 could turn.

(3.)  If history is any gauge, and if April was the peak in PMI, we’re likely to see the DAX pull back.


As some of our subscribers have pointed out, the bailout of Greece and potentially other Euro member states could create downward contagion in Germany (the top loan sponsor), therefore threatening a long Germany position. While we wouldn’t disagree that contagion is a risk, over the intermediate term we see a weaker Euro as a bullish catalyst for the country’s export base and continue to believe that Germany’s fiscal health will help drive its equity market over its debt-laden peers.   To play this divergence, which is one of our Q2 2010 themes (Sovereign Debt Dichotomy), we’re long Germany, short Spain. Currently there is a 16.2% spread between the DAX and the Spain’s IBEX 35 year-to-date.


While we expect to see further slowing (and mild contraction) in PMI in the coming months from gravity as risks surrounding contagion from the sovereign debt bubble play out, we believe the data still supports our bullish call on Germany.  


Matthew Hedrick



German PMI and the Weight of Gravity - pmii



Last week some of us attended a function for Tom Foley, a gubernatorial candidate for Connecticut that was being hosted by some friends of the firm.  While Hedgeye does not have a political affiliation, a fact about Mr. Foley that interested us is that he has never before run for office.  He has, however, enjoyed considerable success in the private sector and served in overseeing some of Iraq’s state-owned businesses in 2003 and 2004.  His platform includes a focus on jobs, balancing the budget through controlling spending, reducing taxes, reducing healthcare costs, and other issues.  Through reining in spending alone, Mr. Foley claims to have identified $1 billion of savings – with a $3 billion deficit currently projected in 2012. 


Outside Connecticut, many more “non career-politicians” could be making forays into the political sphere over the coming months and years.  Allen Alley (candidate for Governor of Oregon), Keith Lepor (candidate for U.S. Congress in the 9th Congressional District of Massachusetts), and Jeff Greene (candidate for U.S. Senate from Florida)  are but three other candidates running for public office with extensive experience in the private sector and similar views on the inability of those currently in office to resolve the major issues, particularly those related to deficit reduction.  Having actually managed a P&L or budget will likely be a real advantage to these folks if they are elected.


While virtually all politicians, incumbent or not, are pledging to address unemployment and public deficits, it is clear that public opinion is swaying against those currently in power.  Public opinion towards those in Washington, in particular, is interesting to consider.  Since the market-bottom on March 9th, 2009, Congressional approval ratings have made a series of lower highs.  The idea of candidates with proven problem-solving experience in the private sector and clear ideas on how to address the burgeoning debt loads on the public is appealing in light of the seeming inability of many currently in office to do so.  For candidates running for office, a lack of political experience may become an attribute in the eyes of the voting public.


We called the Bubble in U.S. Politics out earlier this year.  The most noteworthy trait of the implosion of this bubble could be the declining acceptance of career politicians' inability to represent voters and create effective solutions.  While anti-Washington or anti-politician sentiment is nothing new, the generational lows in acceptance and approval of these politicians certainly are.  As this Bubble in U.S. Politics bursts and the career politicians find new careers, perhaps then people will begin to trust the process again, which will be a good thing for America.


Daryl G. Jones

Managing Director


Rory Green




WINDS OF POLITICAL CHANGE? - congress vs sp50




Inflation's V-Bottom

There are so many price charts like this now that it’s laughable to hear Ben Bernanke say there are no inflation expectations being priced into the economic system.  Assuming the depression historian has access to live quotes, we’ll assume he isn’t looking at the expectations being priced into TIPs, Oil, or Manufacturing Prices Paid.


In the chart below we highlight the V-Bottom in just that – the Prices Paid component of this morning’s ISM Manufacturing report. The month of April saw another sequential rise on a monthly basis (78 versus 75 reported for March) and another higher-high for this stage of the economic cycle.


Now some doves argue that prices are only inflating because they’d deflated so much on a y/y basis. To that point what we have to say is we agree. It’s math. But we’d also add that the 2008 prices from which we deflated were from are all time highs.


Is Bernanke daring you to speculate on reverting back to 2008 price levels? Maybe. With unemployment this high, that will take the low-end of this society right back to the poor house (they are actually there already). For that, I can’t imagine Bernanke’s conscience sleeps well at night. It’s his choice to pander and maintain an inflation policy.


At least Warren Buffett joined our camp this weekend in acknowledging that he is now “concerned about inflation.” Look for some consensus climbers to start following him to where the math has already gone.



Keith R. McCullough
Chief Executive Officer


Inflation's V-Bottom - 1

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R3: Sell It While You Can!


May 3, 2010





M&A and capital markets activity continues to pick up on the margin in retail. Whether it’s JNY rumored to be buying Stuart Weitzman (not surprisingly, at the exact time it needs to start printing real top line growth numbers) PVH completing its deal for Tommy, or Express coming public (why???), the activity is definitely there. In fact, Gordmans Stores, a 67-door off-pricer owned by Sun Capital Partners Inc., just laid out plans to raise as much as $75 mm in an IPO. I bet you were waiting all year hoping to get your hands on this one!!! (yes, that’s me being facetious).


I think one of the more notable items is that Sports Authority just bought Tommy Armour Golf from Hilco Consumer Capital. In the acquisition, the sporting goods retailer has been granted all Tommy Armour and Ram marks, as well as Zebra, 845, Silver Scot and TearDrop. Of note is that since September 2007, The Sports Authority sold Tommy Armour-branded products at more than 450 of its U.S. locations under a license agreement with HCC.  Now TSA can own what it already had premier access to in the first place. 


I’m not trying to bash this for the sake of being negative, but there are two primary points.

1)      All these squirrely little companies that were taken out by levered loans in the 2003-2007 time frame are finally coming out to party. Whether they SHOULD be public or acquired by larger companies is a different story. The fact that they COULD is causing the behavior.

2)      We’ve been saying it for three months, but get ready for TSA to come public. It’s going to pull a ‘Dollar General.’  They’re going to take a zero growth low-return concept, accelerate square footage by 8%, comp for the first time in years due to cyclical forces (Athletic is just starting on a multi-year burst of growth), and raise capital when the P&L and balance sheet are optically aligned to stand out in an otherwise challenging tape. I’m not saying this will be a bad deal, bc I do not know the price. But I can say that it will require the mother of all historical analytical context before drinking the cool aid.    





- After announcing in February that VFC was going to spend an incremental $50 million on marketing this year, management is increasing the budget again. Given strength in the overall topline and specifically in The North Face, Vans, and international, the company is allocating an additional $35 million towards marketing these three key areas over the next 3 quarters. Television advertising will be a key component of the stepped up spend, with emphasis placed on The North Face’s first TV campaign. Test spots are currently running in Boston with a broader launch expected in October.


- In the wake of the wake of the Peanuts acquisition by Iconix, it’s interesting and perhaps surprising to see that Charles Shulz never owned the brand. Scripps retained the ownership as a result of Shulz creating the characters/brand while working for the company. However, due to revenue sharing agreements it is estimated that Shulz himself earned over $1 billion dollars from his Peanuts characters. Shulz was paid $90 for his first month of work on the comic strip- a daily occurrence that he went on to author 17,897 times.


- Growth in viewership of online video continues, with 180 million U.S internet users watching 31.2 billion videos in March 2010. This compares favorably to the 28.1 billion viewed in February. Approximately 85% of all internet users in the U.S watches video online. Not surprisingly, YouTube has a tremendous lead on its competition in terms of market share, with 41.8% of all videos served from Google sites. Hulu comes in at a distant second with just 3.4% share.





 R3: Sell It While You Can! - Calendar





China Tops Value-Added Manufacturing - The International Yearbook of Industrial Statistics 2010, a study conducted by the UN Industrial Development Organization, showed China’s global share of value-added manufacturing - in both textiles and apparel - has soared in the last decade. In textiles, China increased its global share of value-added textile manufacturing in 2008 to 43.2%, up from 16.8% in 2000. Developed countries posted sharp declines: US saw its share slide in 2008 to 6.5% (down from 12.2% in 2000) and Italy posted a decline to 4.8% in 2008 from 9% in 2000. Some emerging economies, such as Brazil, Indonesia, Mexico, and Turkey, also experienced a loss in global share while India and Bangladesh posted gains, the study reveals. China has also managed to make similar inroads in its global share of value-added manufacturing (VAM) for apparel. In 2008 its market share reached 38.7%, leading the segment from a 11.2% share in 2000. Other gainers were Thailand, Vietnam, and Bangladesh. <>


Real Estate Sees Flickers of Hope - Vacancy rates are down in several cities and fewer retailers are asking landlords for rent reductions. According to real estate research firm Reis Inc., the U.S. retail vacancy rate in the first quarter was 10.8%, up 20 bps from the prior period and 130 bps from a year ago. The vacancy rate at regional and super-regional malls rose 10 bps from Q4  to 8.9% in Q1, marking the sixth consecutive three-month period in which the mall vacancy rate hit a record high since Reis began tracking mall data in 2000. Asking rents at malls also have slid for six straight quarters. <>


Luxottica Group SpA Kicks Off Year with Higher Profits - Leveraging growth in the U.S. and in emerging markets, the Italian eyewear company in the first quarter ended March 31 posted a 20.8% rise in net profits while sales gained 6%. Luxottica, which produces eyewear for brands such as Bulgari, Burberry, Chanel, Dolce & Gabbana, Donna Karan, Polo Ralph Lauren, Prada, Salvatore Ferragamo, Tiffany and Versace, said its success was attributable to its integrated business model and “four key pillars”: its own Oakley brand (20% sales growth); both the U.S. and emerging markets, and its efficiency. Sales in the U.S. advanced 6.1%, thanks to the performance of retail chains LensCrafters and Sunglass Hut, where comps rose by 6.6% and 10.8%, respectively. Sales in emerging markets climbed more than 30%. <>


Swatch Partner Says Sales May Grow 30% this Year on China Demand - Hengdeli Holdings Ltd., the retail partner of Swatch Group AG in China, said 2010 sales growth may be the fastest in three years as it expands market share and Chinese consumers splash out on luxury watches and jewelry.  <>


Johnson's Positive Outdoor Results Have Good Implications for DKS - Johnson Outdoors Inc.'s sales rose nearly 6% in the second quarter ended April 2, 2010, reflecting shipments for the peak retail selling season for kayaks, canoes, tents, fish finders and other outdoor gear.  <>


New Orders for Furniture Keep Rising - New retailer orders for residential furniture rose 13% in February 2010 compared with the same month last year, according to the latest Furniture Insights survey of residential furniture manufacturers and distributors from the High Point accounting and consulting firm Smith Leonard.  <>

Triple Crown Worth Half As Much - Two years ago, when Big Brown went into the Belmont with a chance to win the first Triple Crown in 30 years, his owners said a win would make him a $100 million horse, thanks to huge stud fees they'd be guaranteed. As discretionary income has diminished the horse racing industry has gotten clobbered. Sales are still down 40% to 50% and the stallion market, which ultimately drives the value of a Triple Crown horse, has been badly affected. So much so that that that 50% haircut would apply to the winner of a Triple Crown should it happen this year.  <>



We have preliminary numbers that show April was up 70%+. WYNN (Encore helped) and LVS looked to have gained share sequentially at the expense of SJM and MGM.



We’ve got preliminary market revenues and market shares for the month of April in Macau.  We don’t yet have the Rolling Chip and Mass and VIP revenue breakdown but should have that shortly.


Our numbers show that total Macau table revenues were almost HK$13.3 billion.  Adding in HK$650-700 million of projected slot revenue gets us close to HK$14 billion, up over 70% year-over-year.  Seems like the MPEL guys were right.


Turning to market share, it was a big month for LVS and WYNN.  WYNN benefitted from 7 days of Encore.  MGM was a disaster, posting its lowest market share since February of 2009.  Of course, we don’t know who held well and who didn’t but we should soon.  Here is the breakdown:




Restaurant stocks showed considerable weakness to close out last week.


The important divergence between Quick Service and Full Service stocks during Friday’s trading was in the volume.  While both groups traded down on the day, volume was lacking in QSR’s decline while casual dining stocks declined an average of -3.3% on strong volume. 


We are headed into another important week for earnings with DIN, TXRH, PEET, DPZ, CPKI, MRT, MSSR and CEC all reporting.  The coffee names all declined sharply on Friday with GMCR and PEET suffering two of the biggest declines among QSR on high volume.  Coffee prices also showed strength, coincidentally or not, during Friday’s trading.


Last week, DRI’s presentation at the Barclay’s conference indicated that trends in April are slowing.  As a result, I suspect as earnings are released this week the Q1 numbers will look strong but inflation is looming and slowing sales trends are not positively correlated to higher stock prices. 


TALES OF THE TAPE    - stocks 430


TALES OF THE TAPE    - com430


Howard Penney

Managing Director

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