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Doppelgänger Capitalists

“In a capitalist society, all human relationships are voluntary.  Men are free to cooperate or not, to deal with one another or not, as their own individual judgements, convictions and interests dictate."

-          Ayn Rand


After the market close yesterday, Keith and I were chatting about the German government’s decision to prohibit short selling on certain financial institutions and European Union sovereign debt with credit default swaps.   Despite having a good friend Michael Blum who is German, who also happens to be our Chief Operating Officer, I actually know very little German.  That said, the one word I do know is apropos for the decision yesterday by the German government . . . Doppelgänger.


For those of you who don’t know, courtesy of our buds at Wikipedia, the definition of Doppelgänger is as follows:


“In the vernacular, the word "doppelgänger" has come to refer (as in German) to any double or look-alike of a person. The word is also used to describe the sensation of having glimpsed at oneself in peripheral vision, in a position where there is no chance that it could have been a reflection. They are generally regarded as harbingers of bad luck.”


Obviously Keith and I are stock market operators, so we take this attack on free markets implemented by the German government particularly personal.  While trust in governments is at generational lows (we have to look no further than the victory of fringe candidate Rand Paul in Kentucky last night to verify that),  one would have hoped that governments such as Germany’s, who historically have been great advocates of free markets, would simply do the right thing, rather than institute a “harbinger of bad luck.”


Not surprisingly, Europe is selling off hard this morning with most markets down between - 2.5 and -3% on the back of this German policy.  I wonder what vision the Doppelgänger Capitalists see in the mirror this morning?  While blaming short sellers, speculators, stock market operators, and American banks is convenient, it is not the truth.  In fact, fundamentals don’t lie, regulators and governments do.  The issues in Europe can be blamed solely on  government officials, or as we call them, Fiat Fools, who piled debt upon on debt.


In the attached chart, we have highlighted the performance of the XLF, the S&P financial sector ETF, from the date of the SEC’s ban on short selling financials on September 18th, 2008.  The XLF peaked the next day at $22.38 and finally troughed almost 6 months later at $6.26, a decline of 72%.  The SEC’s stated goal with this ban was to “protect the integrity and quality of the securities market and strengthen investor confidence.”  In hindsight, I’m not sure the ban worked out so well...


Coincident with the new German short selling ban, we held a conference call yesterday for some of our top clients that asked the question: Bearish Enough on Spain? As I walked though our thesis, the answer becomes quite obvious, investors are likely not bearish enough on Spain.  I presented a realistic case scenario in which Spain is tripping the wires of 90% debt-to-GDP and 10% deficit-to-GDP in the next 18 – 24 months. (If you would like a copy of those slides and replay of the call, email us at .)


While this is becoming increasingly less the case, an issue that many analysts have when analyzing sovereigns is taking what these Fiat Fools say at face value.  As it relates to Spain, it is advisable to do almost the exact opposite.  On March 7, 2008, Prime Minister Zapatero predicted that, “Spain will achieve full employment. I want to be definite.”


As we discussed yesterday, Spain’s current unemployment rate is 20.05%, which is worse than Iraq and East Timor.  If you didn’t know, now you know . . . Countries Miss the Numbers.  If you don’t believe us that Spain may miss the numbers on their austerity plan, then believe the markets (they are still somewhat free after all) because they are signaling such.


To that point, yesterday Spain came perilously close to its first debt auction failure.   Spain had planned to issue 8 billion euro of short term notes, but the auction failed to attract that amount of bids, so the sale was reduced by 20%.  This is somewhat concerning ahead of Spain’s 10-year auction today and just days after the ECB “rescue” package was unveiled.


Usually I’m the Happy Go Lucky Risk Manager at Hedgeye and Keith is the Grumpy Risk Manager who gets up too early, so I apologize if this note had a slightly more somber tone to it than my prior missives.  But quite honestly, I’m concerned.  This quote from Chancellor Merkel yesterday only underscores my concern:


“The lack of rules and limits can make behavior in financial markets driven purely by the profit motive destructive and lead to an existential threat to financial stability in Europe and even the world. The market alone won’t correct these mistakes.”


Yes, you read that correctly . . . markets and the profit motive are an existential threat to financial stability.


To me, her statement reads as a frontal assault on free market capitalism as we know it.  And that should worry us all.


God speed,


Daryl G. Jones

Managing Director


Doppelgänger Capitalists - XLF

The “Benefits” of Short Selling Bans

Coincident with our Monthly Theme call earlier today at 1pm eastern, the market began to sell off dramatically into the close.  The primary piece of new information from the call was our expectation that Spain could miss numbers for GDP growth and deficit reduction.  So while S&P’s conflicted head of sovereign analysis was hanging up the skates today and going into a new line of work, we were attempting to analyze this situation real-time.


The other noteworthy catalyst in Europe that occurred shortly after our call was that Germany is banning some forms of short selling related to shares of financial institutions and government bonds.  Specifically, the German government is focused on naked short sellers relating to CDS on sovereign debt in Europe.  The obvious question is: what will this do to the CDS market for European sovereign debt? That is, if the market is no longer two ways . . . will there be a market for CDS? And if there is no market for CDS, or ability for large institutions to buy insurance, will they buy European sovereign debt at the same prices or in the same amounts?


Take the market’s reaction for what it is -- the wrong type of regulation.  Naked short sellers or CDS buyers don’t take markets down, fundamentals do.  Or in this case, perhaps, fundamentally misaligned government-implemented market regulations do.


As we’ve outlined in the chart of the XLF (financial sector ETF) below, government-implemented short bans don’t end well.  Or more aptly, they don’t provide the solution they are intended to solve for . . .On September 18th, 2008, the SEC implemented a short selling ban on certain financial stocks to “protect the integrity and quality of the securities market and strengthen investor confidence.”


It’s too bad there wasn’t a inverse ETF on SEC policies.  The XLF peaked the next day at $22.38 and finally troughed on March 9, 2009, almost 6 months later, at $6.26, a decline of 72%.


I think more people than just Hank Paulson were throwing up on that ride.


Daryl G. Jones
Managing Director


The “Benefits” of Short Selling Bans - XLF

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DKS/ANF/WMT/TJX: Notable Divergences


May 18, 2010





Each of these four names seems to have a mind of their own in trading off balance sheet for P&L. The key takeaway from earnings season thus far is that the volatility of these financial rates of change is picking up.


TJX: By far and away the best, with a 23% spread between sales and inventories. But the off price channel – led by TJX has just put up what is likely to be the peak. Companies can’t maintain peak margins and double-digit sales/inventory spread while margins are near peak.


DKS: Tricky Dicky pulled a nice little ‘about face’ and swung back into the upper right hand quadrant after falling off the wagon in 4Q. One thing I like about layering the different trajectories over one another is that you can see the relative volatility in financials. Interesting how DKS looks more like WMT as it relates to P&L/Balance Sheet volatility than it does TJX or ANF.


ANF: Woof. Seriously. It’s so rare that a company has a few quarters of clearing inventory, and drops right back into Quadrant 2. That’s a VERY dangerous place to be. I’m trying to balance 1) higher SG&A + Int’l growth commitment against 2) lower capex guidance at a time when the dollar is strengthening. The delta in capex reduction can’t be explained away entirely by fx. I still think this could be a big stock – but I don’t mind being late on it. In fact – unless answering the question noted above gives me any particular insight, I’m more inclined on the other side.


WMT: Ironically, the all-powerful Wal-Mart didn’t look so hot here – relatively speaking. The quarter looked good and the sales/inventory spread looks good relative to margins -- but the latest data point is a negative change on the margin.


DKS/ANF/WMT/TJX: Notable Divergences - 5 18 10 Agg SIGMA





- With excess supply of big box real estate in the market, landlords are joining the trend of downsizing in retail by sub-dividing existing space in an effort to drive occupancy. Demand from businesses that can fill stores left behind by Linens ‘N Things, Circuit City, and G.I. Joe’s has not been sufficient to offset excess capacity. The upside of this recent trend is that with new construction still limited by tight financing, smaller format concepts will have more options for growth then may have otherwise been available only months ago.   


- One of our favorite discount luxury online retailers – Gilt Groupe is now expanding into home goods again exhibiting the lack of scalability of this model (recall they recently offered gourmet salami). This is further evidence suggesting that sourcing higher-end apparel continues to be a challenge as luxury players seek to meet increased demand at traditionally legacy channels.


- With the reporting of the first positive same store sales result in 15 quarters, Lowe’s noted that the results were in some part driven by extremely favorable weather conditions and the government subsidized “cash for appliance” programs.  With that said, the trend did improve within the quarter, with a notable pick up in bigger ticket items such as kitchen and bath.  Overall, 21 of 23 regions posted positive sales growth for the quarter.





Estee Lauder to Buy Smashbox Cosmetics - The Estée Lauder Cos. Inc. has gone Hollywood, nabbing the photo-studio-born makeup company Smashbox Beauty Cosmetics Inc. in a bid to move deeper into the fast-growing, alternative retail channel and gain entrée into the digital media space. <wwd.com/business-news>


College Hiring Sees Small Uptick - The prospects for new college graduates looking for fashion and retail jobs are improving. Small fashion firms have reduced payrolls and have brought in unpaid interns to take up the slack. Despite some 290,000 jobs created in April in areas ranging from manufacturing to professional services, the unemployment rate for the wholesale and retail trade was 9.5 percent, according to the U.S. Bureau of Labor Statistics.According to the 2010 job outlook from the National Association of College and Employers, firms plan to hire 5.3% more new college graduates in 2009-2010 than in 2008-2009. That’s the first positive news since October 2008. <wwd.com/retail-news>


Report: Young Consumers Shift Brand Loyalty in College Years - Nike is still clearly the brand to beat among younger consumers, but support for the brand wanes as teens move into their college years and then builds again as they age. Conversely, Adidas picks up steam with the college and post-college consumer. While Nike finished with a BSI score well over 700 points overall, both genders, and the 13-17 yr olds, it dropped to 683 among the 18-24 year old group. Adidas has a solid hold on the second spot finishing nearly 100 points higher than Under Armour in the #3 spot. <sportsonesource.com>


Li & Fung Ltd., the world’s biggest supplier for retailers including Wal-Mart Stores Inc., has $1 billion to buy other companies, President Bruce Rockowitz said.

A bond sale earlier this month boosted its acquisition fund, Rockowitz said in Hong Kong today. The company sold $400 million of 10-year bonds denominated in U.S. dollars. Li & Fung, founded in southern China in 1906, has announced a sales target of $20 billion this year, a 49 percent jump from 2009, when revenue fell for the first time since the Hong Kong- based company first sold shares to the public in 1992. Acquiring rivals, and a new contract to supply Wal-Mart, will enable it to reach the sales goal, the company said.  <bloomberg.com/news>


Target Ups its Electronics and Video Games Department - Target stores are rolling out a new open layout with 30% more space for its electronics and video games department. U.S. video games hardware, software and accessories sales in 2009 generated revenue at nearly $19.66 bn, according to The NPD Group. The revamped layout, expected to be completed by June, will feature product accessible fixtures, organized by platforms and game genres. In addition, many stores will also have Learning Centers and Trial Stations.  <licensemag.com>


Indian Ban on Raw Cotton Exports - Indian apparel manufacturers feel the country’s ban on raw cotton exports and abundant supplies of cotton at lower prices, combined with the global economic recovery, will help clothing exports rise about 10% this year. Elsewhere in the region, however, India’s protectionism is having a decidedly negative effect, especially in Pakistan and Bangladesh, textile-producing countries that are heavily reliant on comparatively cheap Indian cotton. Indian farmers and merchants, meanwhile, are angry they have been shut off from their international buyers. On April 19, India indefinitely suspended exports of raw cotton shipments in a bid to bring down domestic prices and ensure there was sufficient cotton for manufacturers here. The ban has hit the countries that buy large quantities of cotton from India, which became the world’s second-largest cotton exporter after adopting genetically modified strains of the plant. In the first two months of the year, it replaced the U.S. as the biggest exporter of cotton after China bought in 265,460 tonnes of Indian-grown cotton, a rise of 1,694 percent from a year earlier. <wwd.com/business-news>


Gap to Open Stores in Italy - Gap Inc. revealed plans to open the first Gap and Banana Republic stores in Italy this year. The stores will be located in central Milan, next to one another in Corso Vittorio Emanuele, one of the busiest shopping streets in the city. Next year, the company is expected to roll out stores in Rome and other Italian venues. The company is expanding its presence globally and, in light of its strong customer base in London and Paris. Gap brand has stores in Japan, the U.K., France and Ireland, while Banana Republic has units in Japan and the U.K.  <wwd.com/retail-news>


Lucy Activewear Hires a Nike Exec as its President - Former Nike Training global director of business development Shaz Kahng is the new president of Lucy Activewear, a brand owned by consumer brand manufacturer VF Corp. Kahng will oversee all aspects of the Lucy brand, including e-commerce and marketing. <internetretailer.com>


Coach and Target Settle Case - Coach Inc., Target Corp. and LF USA reached a settlement Monday that ended an infringement lawsuit the accessories maker brought last year. Court records said the suit, filed in U.S. District Circuit in Manhattan, was voluntarily dismissed. “We are pleased to have reached a settlement that is satisfactory to all parties,” said Todd Kahn, Coach senior vice president and general counsel. Coach accused Target of selling handbags that infringed on the trade dresses of its Patchwork and Ergo designs.<wwd.com/business-news>


Sears Picks New Digital Agents - Publicis Groupe's Digitas has won digital media planning and buying duties for Sears Holdings after a review, according to sources. Annual spending on the account is estimated at $30 million. <brandweek.com>


African Growth & Opportunity Act Missing the Mark - Ten years after the African Growth & Opportunity Act was enacted, it is clear the extension of duty free benefits alone were not enough to build a vibrant, regional apparel industry. When the agreement known as AGOA extended duty free preferences to more than two dozen eligible African countries, it was hailed as a positive model for linking trade with aid for developing regions. Apparel producers, enticed by the duty free benefits the act extended, shifted production into the region. In 2005, five years after AGOA was enacted, it looked like the initiative was on track to be a success as the region’s share of U.S. apparel imports doubled. But in the intervening years, AGOA’s slice of the U.S. market has shrunk back to pre-agreement levels. In February 2010, AGOA countries claimed a 1.12 percent share of U.S. apparel imports, up only slightly from 2000 when the region shipped 1.02 percent of apparel to the U.S. At their peak in 2004, AGOA imports represented a 2.24 percent share of the U.S. apparel market. <wwd.com/business-news>



In this High vs. Low Society that we live in, participation levels in the Supplemental Nutrition Assistance Program are soaring.  The higher end consumer, meanwhile, continues to come back strongly.


Since late 2009, Keith has referred periodically to the participation levels in the USDA’s Food Stamps Program.  Each time, it was noted that the percentage of the population participating in the program has increased drastically since Bernanke took the helm at the Federal Reserve.  February’s data shows that almost 40 million people, or one-in-eight Americans, received food stamps (chart 1, below).  While this is a staggering number, it could grow even without deterioration in the consumer; researchers are commenting that one-in-three people eligible for the program are not taking advantage of the benefits.


For context, in November 2008 we wrote a note entitled, “EYE ON POVERTY: FOOD STAMPS”, that discussed the number of participants in the program exceeding 30 million for the first time.  According to USDA forecasts, the number of participants will increase to 40.5 million by the end of this fiscal year, ended September, and will grow to 43.3 million in 2011.  New highs have been set, monthly, since December 2008.  Interestingly, as Director of Hedgeye’s Retail Team, Eric Levine pointed out in a recent note, the sequential growth in monthly Food Stamps Program participants is slowing for now (chart 2).  Levine points out that this is “marginally good news for those concerned about the state of the U.S. consumer”.  However, over the longer term, should our Q2 theme, Inflation’s V-Bottom play out and high unemployment levels persist, the situation could continue to deteriorate.  As unemployment benefits run out for some of America’s jobless, it seems clear that a larger proportion of eligible people will take advantage of the program.


At the end of the day, numbers don’t lie; people do.  Since March 2009 the S&P500, fuelled by the Fed-sponsored Piggy Banker Spread, has shot up almost 70% (taking into account recent market declines).  From March 2009 to February 2010, the number of people enrolled in the Food Stamps program increased 20%.  Our view on Inflation’s V-Bottom continues to be confirmed by the data (see the Early Look from May 11) and will only serve to exacerbate the situation lower and middle class families face with the stagnant employment outlook.  The employment outlook, along with mounting inflation, is taking a toll.  We have said it before; many of those on Main Street are not experiencing the “recovery” that has bolstered Wall Street.” 


Rory Green



TELLING FOOD STAMPS DATA - 5 11 2010 9 44 59 AM


TELLING FOOD STAMPS DATA - 5 11 2010 1 21 39 PM


SJM has already dented LVS’s VIP share with its junket push and now, LVS may be feeling the Mass pinch as its market share has plummeted in May.


We’ve written quite a bit about SJM’s big push for junket share, and it has indeed paid off – if market share and no margins was their goal.  Higher commission rates paid to junkets and the company’s unique “franchise” structure that offloads more of the risk and reward to the operators have contributed to expanding share.  As can be seen in the chart below, SJM’s Mass share has also increased but not nearly at the rate of VIP's.




It’s hard to be too pessimistic on any Macau operator when the market is growing at a potential 85% clip (in May).  However, for a variety of reasons, LVS is losing share, which could be an issue once the market inevitably slows.




We do know that the Venetian junkets were directly in the sight line of SJM which partially explains the sharp degradation in LVS’s VIP share.  We also believe Encore took a big chunk out of LVS in May, contributing to a 5% sequential drop in share in May month-to-date relative to April.  If SJM is serious and successful in its Mass Market aggression, LVS’s properties could be most at risk given their higher Mass mix. 


SJM maintains third party operating arrangements at many of its properties.  On its quarterly conference call this morning, SJM discussed the opportunity for the satellite properties to cultivate a Mass business.  They believe they’ve only scratched the surface.  We’ll see over the coming months but the opportunity certainly seems to be there.

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