Less SNAP is Good

Less SNAP is Good


Another month of SNAP (formerly known as the Food Stamp Program) data is in, and for the third month in a row the rate of change in participation has slowed.  This is hardly a victory for the American consumer or the country in general, given the absolute levels of those currently receiving benefits is still high by any measure.  As of February, there are 39.7 million people on SNAP representing 18.3 million households.  The USDA predicts 43 million people could be on the program by September of 2011.  Let’s hope their forecasting is as “challenged” as the rest of the government.


On the plus side, we are beginning to finally see an erosion in the growth of those lining up for the government subsidy.  Is this the end of the dollar stores and deep discounters as we know them? Probably not, but what has been a clear tailwind is beginning to finally subside as it pertains to low income food purchase subsidization.  Unfortunately the latest data point is still two months behind, but it is now becoming clearer that the growth in those falling into the lowest income brackets (as defined by need for SNAP) is beginning to slow.  Marginally good news overall for those concerned about the state of the US consumer and slightly negative news for those businesses benefitting from those needing monetary assistance to feed their families.


Eric Levine




Less SNAP is Good  - SNAP


Less SNAP is Good  - SNAP Participation Growth Rate


Less SNAP is Good  - Food Stamps Participation



SP500 Risk Management Levels, Refreshed...

As the market rallies from opening on its lows this morning, we have started to make more sales (long and short) in the Virtual Portfolio.


We sold our trading long position in QQQQ and took our allocation to US Equities in the Hedgeye Asset Allocation Model back to zero percent. Our view of the market right here and now (at 1159 SPX) is implied by our positioning.


Oversold is as oversold does, and we have already seen a large percentage of the price performance associated with an overdue market bounce. The question now is simple: where does this dead cat bounce run out of energy to the upside? We think the answer to that lies in the SPX range of 1165-1187. In the chart below, we show the 1165 line as it is the most formidable line of immediate term TRADE resistance until 1187.


Altogether, the bullish part of this story is that we are in the midst of day 2 where the SP500’s intermediate term TREND line of support continues to hold. That line (thick green line in the chart below) = 1143.


The bearish part of this story is that dropping from here (1159) to 1143 would be a -1.4% correction. In terms of daily risk management, since we had relatively few daily SPX corrections of 1% or more in the months of March and April, these do have a tendency to get people’s attention. A close below 1143 reveals no support to 1105 and that’s the real risk that we want to be protecting against.


If the SPX can hold 1143 for 3 days or more, we’ll cover some shorts and get longer again.


For now, The Risk Manager’s prudent decision is to sell strength, watch levels, and wait…



Keith R. McCullough
Chief Executive Officer


SP500 Risk Management Levels, Refreshed...  - S P

The Faint Squeal

Position: Long Germany (EWG); Short France (EWQ)


While the size of Europe’s loan facility, the €750 Billion Keynesian Elixir, came as a surprise to us, we’ve been vocal that the aid package will offer at best near term support to lessen contagion fears, and is far from a panacea. The European governments that have overextended their balance sheets—mainly the PIIGS—must bite the bullet and issue austerity measures to quell their debt imbalances (or restructure), else they’re simply kicking the can of debt and future inflation further down the road, which will not end well.  What’s clear is the direction for Europe is still very unclear. Certainly while investors’ near-term fears have lessened (see charts 1 and 2 below of CDS and bond yields from the PIIGS), the Euro is shaking against the UDS (clearly not the outcome Trichet hoped for) and the equity markets in Europe are volatile (charts 3 and 4). We stick by our Q2 Theme of Sovereign Debt Dichotomy in which we noted that one way to play the spread is to be long Germany and short Spain. Currently the YTD spread between the German DAX and Spain’s IBEX 35 is over 1700bps.


Matthew Hedrick



The Faint Squeal - c1


The Faint Squeal - cc2t


The Faint Squeal - c3


The Faint Squeal - c4


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R3: The Will to Win


May 11, 2010





This weekend, Hedgeye’s Zach Brown captained the team that brought one of sailing’s most prestigious trophies back to US soil. Those who bet on Europe bet wrong. There’s a good metaphor for companies heavily exposed to Europe.


The Wilson Trophy might not be well known to those that don’t have a passion for the sea. But make no mistake – it’s one of the most prestigious events in sailing.  Here’s a snippet on the event from the host club in England.


“200 Olympic-class sailors compete annually on West Kirby’s marine amphitheatre in one of the World’s favourite events for three days in May. Five thousand spectators and thousands on the web follow 300 short, sharp frenzied races in three-boat teams jostling on an area the size of a football field to earn the coveted title: "Wilson Trophy Champion." Frantic and frenetic, the sailors spin breath-taking skills caressing their boats through a needle's eye within a hair’s breadth of touching at grand-prix speeds. All powered by nature’s winds and the will-to-win.”


It’s always nice to host such an event and have your home team take the trophy. Next year, England’s West Kirby Sailing Club might not want to invite Team Extreme – the US team captained by Hedgeye’s own Zach Brown, who crushed the competition this past weekend and took the Trophy to US soil.


Did the West Kirby Hawks slow down this year? No. They did pretty well, but simply could not keep up with Team Extreme. But European assets not on the water are clearly slowing.


Humor me for a minute, and let’s use this as a metaphor for the Euro/Dollar. We highlighted on April 30 “The Real Question To Be Asking About Europe.”


Specifically…people continue to ask me about Europe, and whether we are ‘hearing about’ weakness given the volatility in financial markets. While I have not ‘heard’ of things slowing down en masse, I think that by the time any of us ‘hear’ about any broad-based weakness, it’s probably too late. Let’s accept the premise that things will slow – and anyone who is exposed to Europe that does not at least prepare for this coming down the pike from a risk management standpoint opens themselves up to a very big day of reckoning. In other words, the questions that we should be asking managements are “what are you doing, and have you done, to prepare for a potential slowdown” instead of “have you started to see any weakness.”


The chart below shows exposure to Europe for major consumer brands in retail alongside the yy changes in FX.


Can I say which domino will fall first? Not yet, but stay tuned. In the interim, while the herd mentality on the sell-side waits to get run over by this like Team Extreme pummeling the West Kirby Hawks, I can’t imagine that the market is going to be too generous with multiple expansion as positive earnings revisions slow, and potentially go negative.


R3: The Will to Win - Euro FX chart





- Coincidence or not, Express is preparing to celebrate both its upcoming IPO and the brand’s 30 year birthday. To celebrate, Vogue is hosting the brand along with a handful of celebrities and models at a fashion show late next week. Up and coming British singer VV Brown is also rumored to be playing the event. All this hoopla makes us wonder who’s picking up the tab for the festivities or is this just a case of setting up easy compares for next year?


- According to an AdweekMedia/Harris Poll conducted last month, 74% of respondents said when a celebrity endorser gets involved in a scandal, it has no impact on their view of the brand he/she endorses. Sounds like Tiger Woods and Ben Roethlisberger will be citing this poll when they look re-build their stable of endorsement deals.


- Keep an eye on Sears Holding’s real estate efforts. A recent update to the company’s corporate real estate homepage suggests the company is more than flexible in trying to take advantage of its vast (and aging) properties. While specifics are not listed by exact location, it appears Sears is willing to parcel up its stores for shop in shops, kiosks, licensed shops, special marketing events, and pretty much anything else one could think of. So much for selling whole properties…





R3: The Will to Win - Calendar





East Beats West in Manufacturing Costs - The East versus West debate for apparel sourcing comes down firmly on the side of Asia, but the Western Hemisphere has settled into its role as the go-to source for close-to-home replenishment. Speakers at the American Apparel & Footwear Association’s “Sourcing, Customs & Logistics Integration Conference” here last week said many of their sourcing strategies will remain the same in seasons ahead, but there are some tweaks being driven by a host of global factors, including rising costs, transportation challenges and increased competition from consumer markets outside the U.S. Apparel industry costs are increasing, said Rick Darling, president of Li & Fung USA, who sees an end to the deflation of apparel prices that resulted from the rise of China as a sourcing powerhouse. China, Vietnam, Indonesia and Bangladesh are the countries likely to dominate sourcing over the next five years, the executives said, but China is sure to retain its top spot. A lot of production in China will continue to shift away from traditional centers in the Pearl River Valley toward the interior of the country. <>


Congressional Paralysis Causes Companies to Absorb 4+ Months of Increased Product Costs - Congressional paralysis on key duty suspension legislation has forced U.S. footwear, textile and apparel companies to change their business plans and absorb more than four months of increases in production costs, with no immediate relief in sight. Congress let legislation expire at the end of the year that suspended duties on millions of dollars worth of certain imported components used to make footwear, apparel and yarns and fabrics. As a result, footwear brands and retailers, yarn spinners and fabric firms have had to pay more than tens of thousands of dollars in duties since Jan. 1, which has forced many companies to either find alternative components and redevelop entire production lines or absorb the costs and raise prices. With duties spiking by as much as 37.5% on hiking boots, many footwear companies are redesigning boots to move them into lower tariff categories, said Nate Herman, VP of international trade for the American Apparel & Footwear Association, whose footwear members include New Balance, Skechers USA, Inc., SG Footwear Inc. and Jones Apparel Group Inc., which has several brands including Nine West. Herman said approximately 15 to 20 footwear companies have been impacted in their hiking boots styles and many are redesigning hiking boots from textile uppers to leather uppers to get lower duty rates. <>


Hat World Acquires a Custom Screen Printer and Embroidery Operator - Hat World Inc. has acquired Brand Athletics Inc., a team apparel and equipment dealer, custom screen printer and embroidery operator. Terms of the deal were not disclosed. <>


Stride Rite Appoints Feiner Senior VP - The Stride Rite Children's Group, a division of the Collective Brands Performance + Lifestyle Group, announced that Matt Feiner has been appointed senior vice president, wholesale, reporting to Sharon John, president of the Stride Rite Children's Group. <>


Bulgari Sees Gains, Narrows Profit Loss - Gains across most product categories and geographic markets, with the exception of Japan, helped Bulgari SpA narrow its loss in the first quarter. Revenues in the quarter rose 11.8% (12.6% cc). Francesco Trapani underscored a positive contribution from directly owned stores and at wholesale, “which showed a general recovery after massive destocking over the last year.” Trapani also pointed to “encouraging signs” at Baselworld, where orders for Bulgari watches and jewelry rose by 60% over last year. “We were also very satisfied with the performance of accessories, especially handbags, which confirms the success of initiatives to boost image, creativity and investments,” said Trapani. <>


Armani Expanding Travel Retail Business - Giorgio Armani SpA is expanding its travel retail business through the opening of six Emporio Armani stores and five Armani Jeans shop-in-shops in the first half of the year. Following the unveiling this spring of the first Emporio Armani stores at the Sydney and Shanghai Hongqiao airports — and the second venue at Milan’s Malpensa Airport — by July the company plans to open units at Macau’s City of Dreams resort and casino and at the Miami and Nice airports.  <>


Ash Cloud May Cost Travel Industry $1.5 Billion, TUI Chief Peter Long Says - The volcanic ash cloud that shut down U.K. airspace for six days last month may have cost the travel industry more than 1 billion pounds ($1.5 billion), according to Peter Long , the head of tour operator TUI Travel Plc .  <> Plans to Hire Hundreds for its New Fulfillment Center - Inc. plans to hire several hundred full-time workers for its fulfillment center in Breinigsville, PA., scheduled to open in summer.  <>




Almost every restaurant stock we monitor surged yesterday.  It is important to note the laggards.  Of the 40 Restaurant stocks we follow closely, two are down year-to-date: BWLD and GMCR. 


All QSR stocks (that we monitor) were up; the average move was +4.8%!  Volume for the group, as compared to the 30 day average, was also up albeit due to exceptional volume seen in trading of RUBO.  RUBO agreed to be acquired by private-equity firm Mill Road Capital LP for about $91 million.  In casual dining, stocks moved an average of 4.3%.  DIN, BOBE, and RT were the notable outperformers, posting strong gains on strong volume.  Notably, BWLD and KONA posted declines.


I see the down move in BWLD, in the face of such a strong intra-day market, as particularly telling and supportive of my view that is running a model that has lost sustainability.  I wrote in detail on this point in 4/28 in a note entitled, “BWLD – IT ALL COMES BACK TO ‘SUSTAINABILITY’”.  Interestingly, BWLD was upgraded to buy from neutral today.  CAKE was also upgraded from neutral to outperform.


TALES OF THE TAPE - stocks 5.10


TALES OF THE TAPE - cmd 5.10


Howard Penney

Managing Director


The Macau Metro Monitor, May 11th, 2010



Sands China should close the $1.75BN financing for its Cotai expansion project no later than May 17 according to CEO of Sands China, Steve Jacobs, which will pave the way for construction to resume on the property.  Jacobs said phase one of the project, which will include 3,700 hotel rooms for the Shangri-La, Traders and Sheraton hotel brands, will open in the third quarter of 2011, representing a "three to four month" delay from the initial plan to open in June 2011.  Jacobs reiterated the project would open with 670 tables despite the Macau government's decision to cap gambling tables in the city.  He also said the company would "find a way" to eventually employ the up to 10,500 construction workers needed to complete the project despite a government proposal to require one local construction worker be employed for every worker from outside Macau brought onto a project.  Jacobs added he is sure there are now fewer than 2,000 workers in Macau available given the flurry of construction projects in the Chinese territory.


According to Jacobs, the company also saw a "low probability" of cost overruns at Sites 5 and 6.  In addition, Sands, which has been approached by local gaming firms in Japan, is eager to move into a market with the potential to be Asia's largest gambling market, Jacobs said.


MPEL has given price guidance of around 10.5% for its planned sale of up to $600MM of eight-year dollar bonds, according to a close to the deal.  Deutsche Bank, Bank of America Merrill Lynch, and Royal Bank of Scotland are the lead managers for the proposed bond, which will be non-callable for the first four years.  A series of meeting with investors in Singapore, Hong Kong, London, Boston and New York were held ahead of the proposed bond sale.



In the end of 1Q2010, the total number of non-resident workers decreased by 2,062 QoQ to 72,843.


The lack of adequate infrastructure, particularly an airport with extensive international connections, is the main reason Macau’s meetings business has not grown as fast as expected, says Michael Leven, president and COO of Las Vegas Sands. The city started pursuing business travelers seriously with the 2007 opening of the Venetian Macau, ''but we didn’t have enough hotel rooms to get the big functions." ''Even if we have 3,000 rooms at the Venetian, we needed more, which is what we’re building now'', Leven told The New York Times.

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