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R3: Meteorological Observations


May 5, 2010





March’s strong sales results, which resulted from a near perfect confluence of positive events (great weather, tax refunds, easy compares, Easter shift, pent-up demand , etc…) inevitably make for difficult comparisons when tomorrow’s April sales are reported.  There’s no question that results will appear to have slowed this month and we’re already seeing some rumblings as to why.  We’ve seen weather being used recently as an excuse, especially in the golf sector.  So, in advance of tomorrow’s releases, we want to make sure we at least get facts straight on the meteorology.  It is clear from the weekly trends, that there was a divergence between cooler weather on the West coast and warmer weather on the East coast.   What this amounts to is a little bit of something for everyone.  Those with a national footprint may actually net out to “normal” weather exposure, while those with West coast exposure are likely to express the “blues” .


Eric Levine



R3: Meteorological Observations - weather1

 R3: Meteorological Observations - weather 2


R3: Meteorological Observations - Rain1

R3: Meteorological Observations - rain2





- Amidst the flurry of congratulatory comments on the True Religion conference call, a subtle detail may have been overlooked. The company’s same-store sales, which were only released for the second time (given the inherent youth of the store base), slowed sequentially in 1Q10. With a comp base of 46 stores, same store sales increased by 18.7% in the quarter vs. 22.3% in 4Q09 (36 store base). Interestingly, same store sales including e-commerce were 18.2%, indicating that the .com platform was negative for the quarter.


- Despite a normal seasonal shift, Steve Madden noted that boots and booties were a strong category in the recently reported Q1 results. Given the strength, AUR’s were strong in the quarter. Overall booties made up 52% of the company’s mix in the quarter, up 1100 bps year over year. Given this strength and the strong order book for deliveries slated for 6/25 and 7/25 management is confident that boots will remain strong through the Fall. However, the company is not planning as aggressively for the category given last year’s very strong results.


- It’s important to know where the competition stands, especially in the global athletic footwear environment. On yesterday’s Adidas conference call, management stated, “On market shares when we talk about market share then we mainly talk about market share within our main competitors [like] Nike.  Nike is in the first half growing faster than us because they started earlier to clean [up their business and inventories].” Recent sell-side concerns about Adi’s success at the expense of Nike were clearly overblown.


- It’s hard to believe that Dr. Martens may be making a stateside comeback, but the opening of the brand’s first NYC outpost may be a starting point. After celebrating the brand’s 50th anniversary by giving away free shoes at the London store, this may be the first credible attempt to revive 90’s fashion.





R3: Meteorological Observations - Calendar





USITC Investigation Could Lead to Higher Duties for Certain Footwear with Textile Outsoles - The USITC has conducted an investigation under Chapter 64 relating to certain footwear featuring outer soles of rubber or plastic to which a layer of textile material has been added. These changes would reflect decisions on the classification of that particular footwear. If the proposed recommendations are accepted by the USITC and green-lighted by the president, foreign footwear manufacturers would no longer be able to use glued on/slapped on and appliqué textile outsoles to lower the duty rates on several footwear items, including 19 types of rubber/fabric and plastic/protective footwear that are still manufactured in the United States. This footwear would be classified under heading 6404 (footwear with outer soles of rubber, plastics, leather or composition leather and uppers of textile materials) with duties ranging from 20% to 67.5% instead of heading 6405 (other footwear) with duties ranging from 7.5% to 15%.   <fashionnetasia.com>


Web Shoppers' Experiences Improved - According to the latest survey from research group ForeSee Results that monitors 100 internet retailers, web sellers mostly garnered more positive ratings than they did a year ago, when many were in survival mode. This year, the poll’s composite score set a record high of 78 on the survey’s 100-point scale, up almost 5 points from a drop-off last year. L.L. Bean led among the 23 apparel and accessories retailers on the list with a score of 82 (80 and above is excellent), and was followed by Coldwater Creek Inc., at 80. Abercrombie & Fitch Co., Polo Ralph Lauren Corp. and the Victoria’s Secret unit of Limited Brands Inc. each logged a 79. In the mass merchant category, J.C. Penney Co. Inc., Kohl’s Corp. and Wal-Mart Stores Inc. all made the top 10 with a score of 80. Beauty firm Avon Products Inc. came in third in the overall rankings with a score of 83, while Web giants Netflix Inc. and Amazon.com Inc. took first and second, respectively.  <wwd.com/business-news>


E-Retailers Top 500 Guide Take Aways - This year’s Top 500 Guide reveals several trends that emphasize consumers’ continuing shift to online buying and the shift to large retailers:

  • The Top 500 retailers’ sales grew 8.7% to $126.38 billion in 2009 from $116.28 billion in 2008.
  • Total traffic to the Top 500 increased 22.9% year over year to 2.58 billion monthly visits from 2.10 billion visits in 2008.
  • Web sales now account for 6.5% of retail sales, up from 6.2% a year earlier.
  • Web sales were the only growth area for most chain retailers( 26 of the 50 biggest chains)
  • The Top 100 grew 11.6% and the retailers number 401 to 500 in the Top 500 Guide grew 2%, further evidence that a shift to bigger online retailers is taking place.

By category, last year’s results show:

  • Combined sales for all top 500 web-only merchants grew year over year by 19.8% to $42.94 billion from $35.83 billion.
  • Consumer brand manufacturers in the Top 500 grew web sales by 3.8% to $15.30 billion from $14.74 billion in 2009.
  • Retail chains in the Top 500 grew combined web sales last year by 6.6% to $49.80 billion from $46.71 billion.
  • Catalog companies posted a drop in sales last year, declining by 3.1% to $18.32 billion from $18.91 billion.  <internetretailer.com>


Sears Making a Major Apparel Push - The mandate to turn around apparel was emphasized at the outset and underscored throughout the three-hours-plus shareholders meeting. Kmart is performing well with an apparel turnaround while moving to everyday pricing and significant improvements to the in-store experience. Revitalizing the Sears apparel brand is a top priority. New brands exclusive to Sears and Kmart, such as Bongo and Dream Out Loud with their younger demographic, will be key drivers. John Goodman, executive vice president of apparel and home, is building a new culture around apparel with significant talent. <wwd.com/business-news>


Athleta Opens 1st Store - Athleta, Gap Inc.’s online women’s sportswear and activewear company, is taking a first step into the world of bricks and mortar. Less than two years after Gap acquired Athleta for $150 mm in cash, the specialty retail giant will roll out the first Athleta test store in Strawberry Village Center in Mill Valley, Calif. The test store, which will be 2,424 square feet, is slated to open before the end of this month, said a spokeswoman at the Strawberry Village Center Mall.  <wwd.com/business-news>


Cabela's Reports -1.7% Comps - Cabela's Incorporated reported total revenue for the quarter of 2010, adjusted for divestitures, increased 5.1% to $559.6 million; retail store revenue decreased 1.5% to $271.3 million; direct revenue increased 2.1% to $222.7 million; and comparable store sales decreased 1.7%. Cabela's Plans Stores for its third store in Texas and its first in Oregon.  <sportsonesource.com>


 R3: Meteorological Observations - CAB SIGMA


Overstock.com Starts Off the Year with Stronger Sales and a Profit - For the first quarter ended March 31, Overstock reported an increase in revenue of 42.3%. Net income was $3.7 million compared with a net loss $4 million in the prior year. <internetretailer.com>


Girl Obesity Rises 2x Rate of Boys - The percentage of obese girls in the United States increased more than twice as much as the percentage of obese boys from 2003 to 2007, according to a study released Monday by researchers at the Health Resources and Services Administration. Potential tailwind for plus sized women's specialty retailers such as CHRS.  <sportsonesource.com>


Guess COO Steps Down - Carlos Alberini has stepped down as president and chief operating officer of Guess Inc., the Los Angeles retailer and wholesaler, to become co-chief executive officer of Restoration Hardware, effective June 1. Alberini, 54, has been at Guess since December 2000 and has agreed to remain on the board at Guess for two more years. <wwd.com/retail-news>



Agonizing Math

“He who will not economize will have to agonize.”



Yesterday was a great day for risk management. I don’t say that because most markets were down. I say that because markets actually did what the math said they should. In other words, from Spanish equities to US volatility, the macro moves were proactively predictable. Markets don’t lie; people do.


I went into the US equity market part of the day with a similar position to Ben Bernanke – at least in terms of absolutes. Rather than posting a zero percent rate of return to prudent American savers who refuse to be dared to speculate, I posted a zero percent asset allocation to US Equities.


If you are me, making a short call on the SP500 to correct on the order of 4-7%, it stands to reason that I would not only have been short the SP500 but not, at the same time, telling our clients that I want assets allocated to a market that I think is going down. Only a full service super-market-ing broker/dealer would tell you do something like that with your hard earned net worth.


You know I love to be right. I’m not one of those people who wakes up every morning expecting to be wrong. I don’t get paid what I used to, but I am certainly having more fun. My goal this morning isn’t to grandstand. It’s actually to explain what it is that I do. My friends call me Mucker, and I am your Risk Manager.


Every short call starts with a top down Global Macro Theme. We change these themes every three months because market prices and the expectations embedded in them do. As a reminder, our Q2 Macro Themes at Hedgeye Risk Management are:

  1. Sovereign Debt Dichotomy (short the Euro, long the USD; short Spain, long Germany)
  2. Inflation’s V Bottom (long TIP, oil, Aussi dollars, Chinese Yuan; short SP500, short term Treasuries and select US Equities)
  3. April Flowers/May Showers (short the SP500 with a topside target of 1214)

If you’d like the slide presentation for these themes, email the ex-Captain of the Colgate Women’s Field Hockey team who show jumps as our head of sales, Jen Kane, at . Jen plays center link for us in New Haven and she is flanked by a recently retired pro hockey player named Leclerc and our race car driver, Bergie.


Once we establish these top down themes, we lock, load, and refresh our multi-factor risk management model. We refresh our view (upside/downside bands of probability across 3 investment durations: TRADE, TREND, and TAIL) every 90 minutes of marked-to-market trading. We refresh because prices, volatility, and volumes are constantly changing.


We call this dynamic (real-time) risk management. At the Bloomberg Hedge Fund Conference yesterday afternoon in NYC, I had a great discussion with John Taylor (CEO of FX Concepts) and Dean Curnutt (CEO of Macro Risk Advisors) about being a risk manager in these globally interconnected times. Both gentlemen agreed that managing risk doesn’t occur in your ideologies or politics. It occurs daily and mathematically.


We don’t need to geek out on the math this morning, but we do need to remind you that there is a huge difference between managing risk in an interconnected ecosystem whereby you accept certainty (ie. I know Mastercard is going to have a good quarter) and uncertainty (chaos and complexity theory). The last price is what matters, and your daily objective should be to manage the risks associated with probable outcomes based on that real-time price.


Back to the grind… and explaining what we did yesterday… and what we’ll do this morning…


Like Jim Chanos, who seems perfectly ok with talking about his Chinese short position in transparent forums these days, we like to make all of our moves on a live marked-to-market investment portal. Here’s what we did yesterday as the market weakened – everything is time stamped:

  1. 1012AM, sold Mastercard (MA) after a solid EPS report
  2. 1019AM, sold the US Dollar ETF (UUP) on strength
  3. 1040AM, covered our short position in Ross Stores (ROST) on weakness
  4. 1044AM, covered our short position in the Euro (FXE) on weakness
  5. 1051AM, bought China (CAF) on weakness
  6. 1223PM, bought Intercontinental Exchange (ICE), on weakness
  7. 1226PM, covered our short position in the SP500 (SPY) on weakness

That’s it. That’s the best transparency I can give you on what it is that we actually do with all of our math. We have a research team that’s approximately 22 people in size (depending on what Big Alberta eats for breakfast). We grind research. We fade the market’s price action. We rinse and repeat.


As of this morning’s real-time prices, here are some critical risk management thoughts.

  1. SP500 immediate term TRADE support and resistance levels are now 1170-1192 (we’ll look to re-short the bounce)
  2. SP500 intermediate term TREND line of support = 1143; so ultimately, this correction has another -2.6% to go from last night’s close
  3. VIX (volatility) was up +18% yesterday to 23.84 and is now bullish on both TRADE and TREND with TREND line support = 19.51
  4. US Equity market volume was up a moon-shot +34% on our daily risk management study = bearish when combined with price/volatility
  5. Spanish equities have officially crashed, down another -1.5% this morning and down -21.5% since January
  6. The Euro is immediate term oversold and now has refreshed support/resistance levels of 1.29-1.32
  7. Brazil’s Bovespa finally broke its intermediate term TREND line = 68,334 after Brazil raised interest rates by 75bps to 9.5%
  8. Hong Kong’s Hang Seng is now broken from a TRADE and TREND perspective after trading down another -2.1% overnight
  9. Dr. Copper is signaling abort mission to the global growth trade; breaking its intermediate term TREND line of support at $3.35/lb

There are plenty of other “fundamental” news items this morning affecting prices. From Dodd/Shelby on Financial Reform to Putin Power taking this Euro freakout as an opportunity to seize Ukrainian energy assets, the “news” is always there.


All the while, our role as your Risk Manager, is to have our feet on the floor earlier than most, consume the news, and register the price action. No one said this is easy. That’s why we do it. And global macros risk waits for no one – so there are no days off.


Proactively sell high; buy low; and remember, “he who will not economize, will have to agonize” reactively. So capitalize on his consensus emotions.


Best of luck out there today,



Agonizing Math - Bovespa



The Macau Metro Monitor, May 5th, 2010




The Secretary for Transport and Public Works, Lau Si Io, says the government has received “a lot of applications” for land in Cotai. Lau says companies have requested land in the north of Estrada Flor de Lotus for “tourism and entertainment purposes” but did not specify which companies.

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The market came under pressure on Tuesday as one of our 2Q themes Sovereign Debt Dichotomy continues to gain momentum and drive incremental volatility. As a result, there was a significant pickup in RISK AVERSION trade associated with skepticism surrounding the ability of the issues Greece in facing spreading to the rest of the world.


On the heels of that trade, the VIX was up 18% yesterday and 36.5% over the past month. The Hedgeye Risk Management models have levels for the VIX at: buy Trade (19.41) and sell Trade (25.08).


We have been very vocal about the mounting sovereign solvency issues in Europe.  In many ways, the European crisis echoes the way the U.S. banking crisis brought the global banking system to its knees.  At that time, the global monetary policy-makers allocated trillions to prevent systemic collapse.  In total, the sovereign debt crisis in Europe could also pose the threat of systemic collapse.  As with the U.S. banking crisis, I expect that everything possible will be done to prevent that type of massive melt down. 


 As a result, U.S. fiscal stability is the key to keeping global systemic risk in check.  Unfortunately, our balance sheet issues are very much the same as those facing the PIIGS. Despite this, the dollar is a beneficiary of the RISK AVERSION trade rising 1.25% yesterday. The Hedgeye Risk Management models have levels for the DXY at: buy Trade (82.05) and sell Trade (83.39).


The MACRO calendar was a tailwind, but failed to offer any reprieve for stocks as better-than-expected March factory orders help to put the REVCOVERY trade on solid footing. In addition, pending home sales were surged on the expiration of the homebuyer tax credit.


The low beta defensive sectors such as Healthcare (XLV), Consumer Staples (XLP) and Utilities (XLU) were the relative outperformers yesterday. The commodity equities saw outsized losses on a dollar rally and a 2.3% decline in the CRB. The Materials (XLB) sector suffered its biggest one-day pullback since February 4th. Along with the macro headwinds from Greece and Spain, Copper is BROKEN and worries that China may be gaining some traction in its efforts to dampen liquidity also seemed to weigh on the sector.


In early trading, oil is trading down nearly 1.4% after suffering a 4% decline yesterday on the heels of increased tightening in China and a pickup in the RISK AVERSION trade with the dollar advancing 1.25% on the day. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (81.67) and Sell Trade (84.63).


Yesterday, copper suffered a similar fate to oil as global RISK AVERSION and incremental tightening in China facilitated a decline of 3.5%. The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.16) and Sell Trade (3.35).


In early trading, gold is trading down slightly, down 0.15%. This is following a 1.2% decline yesterday on dollar strength. The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,165) and Sell Trade (1,188).


In early trading, equity futures are trading flat to fair value as some stability returns to markets after Tuesday's dramatic decline. At 8:15 the ADP jobs data will be monitored for a potential positive reading as it has become a proxy for non-farm payrolls which are due on Friday. As we look at today’s set up the range for the S&P 500 is 22 points or 0.3% (1,170) downside and 1.6% (1192) upside.


Today’s MACRO events: 

  • MBA Mortgage Applications
  • April Challenger Job Cuts
  • April ADP Employment
  • April ISM Non-Manufacturing Composite 

Howard Penney

Managing Director













McCullough Says Market Volatility Up on `Fear' in Greece


In preparation for LVS's Q1 earnings, we've highlighted management's forward looking commentary from its Q4 conference call and subsequent investor conferences.



LVS hasn't set an earnings date but we're guessing it could be Thursday after the close.  We are considerably above the Street in company EBITDA, $341 million versus $295 million, respectively.  We estimate total Macau EBITDA to be $273 million and Las Vegas to generate $101 million.  We think Las Vegas played lucky in the quarter and we are estimating 24% table hold versus 20.5% last year.  Baccarat volume was also very strong in Las Vegas.




Business update from Deutsche Bank's conference on 3/3/2010 and CLSA AsiaUSA Forum on 3/1/2010:

  • "I think that I do know that we’ll probably reach about our goal of 660,000 room nights. I think we’re somewhere about 500,000 now and our goal for next year is 800,000 plus and then I think we’ll bring it back to the most recent pre-crisis number. And from my standpoint, that gives us a base of about 7,100 suites and then we can yield up from there."
  • "So I think we look very good, our numbers were primarily beginning with the two for the ADR and I think our occupancy rate was starting with a nine (January and February)."
  • "We’ve checked out what Singapore is doing and what Genting is doing and they’re doing incredible numbers, like S$500 bet on baccarat. But that was the holiday. Now they are down to about 250, S$300. So take 70% of that, so it’s over $200 for the average bet in baccarat. Compare that to Macau, which is $85. Compare that to Vegas, which is $25... But that’s on the mass market side."
  • "We can only figure the theoretical, but based on my 20-year experience in Vegas, it’s typically about half of what the actual is. So, the bottom line is that Mike Leven and I have discussed over the last couple of days, redoing our numbers on the high side. And we were estimating $3,600 per win per table per day and about 250 or $300 win per slot per day. And now we find out that the slots (from Genting) were winning $1,000 a day."
  • Customers for MBS: "The first country is of course Singapore. The first country beyond Singapore is Malaysia. Also, Indonesia will be two, Thailand will be three, the Vietnamese might be four and China would be five. But on the high roller side, I don’t think we’re looking at any mass market. Mass market may come from Malaysia, Indonesia, maybe some from Thailand, but we’re going to raise the level of spend that each person from Thailand would bring with them. So the average batch will be significantly higher, which is what Genting is showing us up till now. The average batch is significantly higher than what we’re experiencing both in Vegas and Macau."
  • "As far as the hiatus concern, we have no indication except people that we talk to, and our own sales people– field junket reps. They just get a commission on sending some body in with a small several thousand dollar cap for the commission. They don’t provide credit or they don’t provide collection or something like that, they just send the player in."
  • Japan: "There is a committee of one member of each of the two governments, the LDP and DPJ, with whom we’ve met before. It’s a long process because Japanese change things very slowly. But what you should know is that there’s 16,000 pachinko parlors that does admittedly 25 billion."
  • Conventions/FIT: "So, gaming is in everybody’s nature, FYI, only 14% of the people who go to Vegas, according to the convention authorities research, go for the purpose of gaming; that means 86% go for other reasons, including conventions. We see the convention market picking up, I won’t say significantly, but I will say substantially from where it was. It was at it lowest point last year, and one guy characterized that they’re coming in force. For this year and we think next year, there’s a possibility we’ll get back to the levels of ‘07. So, the groups are picking up, but the FIT market is low."

Q4 Conference Call:

  • Sands Bethlehem: "We expect to introduce approximately 80 tables to the property in the third quarter."
  • "The pace of group bookings continues to improve and all signs indicate 2011 will be stronger than ‘10. In 2009 we realized approximately 470,000 group room nights, as of today we have more than that number on our books for 2010."
  • "In addition, in March, we expect to close the previously announced $1.75 billion credit facility to fund construction of parcels 5 and 6 in Macau."
  • Rates: "We’re trending down, relative to 2009 rates, we’re 211 for actual group segment for the year. We’re down in the 180 range for 2010, high 170’s, low 180’s."

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