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R3: June 1, 2010


June 1, 2010





-In an example of how big the viral nature of the internet can be, Nike’s “Write the Future” ad set a new record for the most views.  According to web video analytics company Visible Measures, the Nike ad focused on the World Cup has achieved 7.8 million views in its first week alone.  This compares favorably to the recently launched “Earl and Tiger” video which reached 6.3 million views in its first week. 

Hedgeye Comment: Yet another blow to the traditional advertising model.  Aside from the cost to produce the 3 minute video, it certainly seems more effective to post on youtube and let the consumer do the rest.


-While continued demand for the male shape-wear may not surprise many (think Spanx for men), what did catch our eye in a NY Times article this past weekend is the primary demographic. Equmen, another leading shape-wear brand, noted that 75% of its sales come from males aged 37 to 42 - perhaps a sign of deferred gym memberships. Less surprising is the fact that online sales are significantly more brisk than at retail suggesting this trend may still be the best kept secret for many.

Hedgeye Comment: As one of the few hot spots in men’s retai (albeit small), we wouldn’t be surprised to see major leading brands dip their toes in the waters with variations of this product in the coming months. However, can shape-wear and toning co-exist?  Maybe some cross marketing between the two is on the horizon as well. (Note from McGough: the product works. Please allow me to maintain a shred of dignity and don’t ask me how I know).





ICSC Sees 2011 as the Retail Property Turnaround - Developers and retailers at the International Council of Shopping Centers ReCon convention here said bankruptcies, widespread store closures and falling consumer demand are in the rearview mirror, but don’t anticipate a strong, sustained recovery until at least next year. One fear is that there could be a false sense of security. Depending on the disruption in Europe, you could have a liquidity crisis again. Many retailers aren’t waiting out the uncertainty on the sidelines. With shoppers perking up, retailers that withstood the worst of the downturn have cash on hand and are considering expanding before rents rise. Most shopping center players agreed that retailer momentum would pick up starting next year. “There are a lot of people talking about new stores, but there are a lot of people talking about them in 2011,” said Michael Glimcher, CEO of Glimcher Realty Trust. <wwd.com/business-news>

Hedgeye Comment: With earnings for most retailers now reported, the latest commentary from the retailers themselves remains consistent with the ICSC chatter.  This especially holds true for new developments, which still appear to be at least a couple of years away from rebuilding a measurable pipeline.  We continue to believe the environment will remain much better for all players if they continue to stay on the sidelines, pursuing modest growth.  The old days of growth for the sake of growth seem to be relegated to IPO’s disguised as growth stories- at least for now. 


ASDA Buys Discount Retailer Netto - ASDA, a subsidiary of Walmart, has acquired the discount retailer Netto, which has 193 shops in the U.K., for £778 million ($1 billion), strengthening its position as the country's second-biggest food retailer and establishing a footprint in a small store format. ASDA intends to boost its smaller-format store portfolio and said the Netto outlets will be added to a new division set up for supermarkets smaller than 25,000 square feet. It hopes to complete the takeover later this summer, subject to regulatory approval, and rebrand the Netto stores by next summer. ASDA also intends to expand its non-food ASDA Living chain. <licensemag.com>

Hedgeye Comment: After staking its claim as a large format leader with stores nearly 20% larger on average than competitors, acquiring Netto is a  sharp contrast to the retailer’s prior growth strategy.  However, with large box real estate at a premium in the UK, it appears that WMT/ASDA clearly realizes that it may just have to shrink-to-grow, a step in the right direction and incremental positive in our view. It will be interesting to watch how WMT uses this acquisition over time to build a whole new level of expertise in small box distribution. 


American Brands Rushing to Europe for M&A to Sustain Growth - American brands are rushing to counterbalance the slowing domestic market by moving into undeveloped regions abroad, especially Europe. Several brands, such as Esprit and Tommy Hilfiger, once enjoyed great popularity in the U.S., only to fall out of favor later in their life cycles. Despite the loss of brand cachet in the U.S., however, these brands remained well accepted and fashionable in Europe. The weakening of the euro against the dollar over the last few weeks has only added urgency to American firms expanding into Europe. Growth-driven public companies have come to recognize they no longer have the luxury of relying on a single market, even the $10 trillion U.S. consumer economy. Acquisitions are a way to accrue real estate locations that would take years to develop on your own. <wwd.com/business-news>

Hedgeye Comment: With one major deal done this year (Tommy), it’s hard to envision a major rush here in M&A purely based on the Euro.  Remember, that US companies historically have had a hard time making a go at European retail in a large scale manner.  We find it very unlikely that retailers would look to make a “land grab” in a knee jerk manner, just to get a jumpstart when the Euro weakens.


SKS May Not Benefit All That Much From a Falling Euro - A 'Heard on the Street' column notes that while manufacturers increased prices when the euro strengthened against the dollar, prices may not be so quick to fall as the euro falls vs the dollar. Many European luxury makers have kept dollar prices firm but retailers may complain if the euro falls much further. However, the makers have a strong position with iconic brands. Plus, a weak euro could hurt the tourist shopper that has helped the company. The share price reflects takeover speculation and could fall quickly is either of the major holders decides to sell any of their stakes. <WSJ.com>

Hedgeye Comment: No direct exposure gives Saks an unquestionable advantage in a declining Euro/USD environment. Yes, tourist driven revs will take a hit, but let’s not forget the offset of domestic spending induced by increased confidence stemming from a stronger dollar.


PSS's Above The Rim Signs NBA Player Martell Webster - Above The Rim (ATR), which is being re-launched this year by Collective Licensing International, has signed a multi-year endorsement contract with rising NBA player Martell Webster. <sportsonesource.com>

Hedgeye Comment: The first of several signings we expect to be announced as CLI readies the brand for a revival in the 2H.  Also, keep an eye out for a push into basketball loving China.


Adidas Responds to Claims that the World Cup Ball Sucks - Adidas hit back Monday at criticism that the World Cup ball is difficult to control and a nightmare for goalkeepers, stressing that it was widely tested and approved long ago. <sportsonesource.com>

Hedgeye Comment: There’s nothing like a little controversy to drum up some free PR. Hey, it worked four years ago – no reason why it shouldn’t work again.


Bebe’s Social Strategy Keeps Fans Up with its Kardashian Collection - Bebe Stores’ February social marketing campaign to promote a clothing line developed with TV reality stars the Kardashian sisters was so successful that the retailer turned to the online social realm again this month to support its newest collection. <internetretailer.com>

Hedgeye Comment: Let’s just hope that the Kardshian’s can stay in the spotlight long enough for the line to actually sell through.


BBBY Rolls Out Exclusive Elizabeth Arden Collection - Bed, Bath and Beyond is rolling out an exclusive line of spa-inspired items under the Elizabeth Arden brand. The collection from licensee London Luxury includes towels in 12 colors, bath robes and slippers. <licensemag.com>

Hedgeye Comment:  Another sign that the traditional department store channel continues to lose its stranglehold on the premium cosmetic sector.  Yes, this is a licensing deal but years ago it would have been unheard of to see the Arden brand in Bed Bath and Beyond.


Wal-Mart's Sam's Club Is Customizing Bargains For Individual Members - The company's eValues program is looking to tailor bargains for each individual member based on previous buying patterns. The company has improved coupon response rate from 1-2% to 20%-30% for eligible customers. <streetaccount.com>

Hedgeye Comment:  What better place than a membership-only environment to tailor promotions by customer?  Given that each of Sam’s millions of members holds a card, which is in turn tied to the entire customers purchasing history, it’s a no-brainer to offer targeted deals based on a consumer’s brand and product preferences.  Is Costco next?


Chinese PMI, Weaker Than Expected . . . But More Than Meets The Hedgeye

Anyone that has been watching either the Chinese stock market or commodity prices for the last six weeks won’t be surprised that we received a couple of data points this morning that confirm economic growth is slowing incrementally in China.  The first, the official China Federation of Logistics and Purchasing managers index fell to 53.9 in May from 55.7 in April. The second, the HSBC China Manufacturing Purchasing Managers Index, fell from 55.2 to April to 52.7 in May – which is the lowest level in a year. 


Despite the sequential decline, both of these indices are still above 50, which denotes expansion in economic activity. We’ve outlined this sequential change from April in the chart below, and would highlight that 54 on the Chinese PMI reading has historically been a bit of an important line, and the next move will be critical to watch.


Interestingly, the most noteworthy change in the Purchasing Managers Index was a change in input prices, which fell dramatically from April’s reading of 72.6 to 58.9 in May.  This implies that underlying unit demand was likely moderately stronger than the headline number suggests, which, perversely, is probably a negative leading indicator for the next PMI data point.  Presumably, the Chinese government will look at the components of the index, and realize that their efforts to slow the economic growth, or potential overheating, are working on the margin, but perhaps not slowing the economy to the extent Chinese officials had hoped.


This interpretation, in conjunction with some of the recent inflationary data points from China that we’ve highlighted below, could lead to more aggressive tightening from China.  These inflationary data points include: 

  • Chinese CPI (Consumer Price Index) and PPI (Producer Price Index) are up 2.8% and 6.8%, respectively, year-over-year. Combined, this is the largest spike in combined inflation in 18 months;
  • Chinese property prices, based on a survey of 70 cities, were up 12.8% year-over-year in April, which is the largest spike since 2005;
  • Chinese money supply growth was up 21.5% year-over-year in April;
  • Chinese loan growth was up 51% sequentially from March to April at 774B Yuan; and
  • Chinese industrial production was up 17.9% on a year-over-year basis in April. 

Obviously, these are primarily April numbers, so May data will also have to be appropriately inflationary to warrant further tightening, but while the headline PMI numbers suggest some economic slowing, the internals are less supportive and suggest still robust expansion in China.


Daryl G. Jones
Managing Director


Chinese PMI, Weaker Than Expected . . . But More Than Meets The Hedgeye - China PMI


The Macau Metro Monitor, June 1st, 2010


HIGH EXPECTATIONS macaubusiness.com

According to Ming Pao Daily, SJM's CEO, Ambrose So Shu Fai, expects overall gaming revenue in Macau to exceed MOP 150 billion (~30% YoY).  This would imply a slowdown in GGR for the latter half of the year.  SJM’s capital expenditure will be MOP800 million this year.


NO ONE HAPPY macaubusiness.com

Several points to note about the new imported laborr regime:


1) According to the coordinator of the executive committee of the Standing Committee for the Coordination of Social Affairs and the head of DSAL (Labour Affairs Bureau), Shuen Ka Hung, the ratio of imported to local workers varies according to the "actual conditions" of different companies.


2) For now, the government has announced that croupiers, professional drivers, and floor supervisors are local-only jobs.


3) Employers are required to pay a MOP200 monthly fee for each non-resident worker hired.  But the manufacturing industry will only need to pay 50% of the levy. There were 73,932 non-resident workers in Macau at the end of February


4) Dormitories provided by employers to imported workers, are also obliged to comply with a clear minimum set of health and living conditions (usable area of no less than 3.5 square metres, bed per head, fans, bathroom equipped with a hot/cold shower facility and a washing machine for every 8 imported workers). If housing isn't provided for workers then employers must provide a housing allowance of MOP500/ month/ employee.


The construction sector is known to have the worst living conditions for workers. For example, just days before the new regime came into effect, the DSAL led a raid targeting Galaxy Macau’s construction site and found a complex of illegal dormitories for around 800 imported workers.


5) Because of higher costs, employers are not happy with the new regime. Employees are also wary because they do not want the changes in imported labor rules to depress wage rates for local workers. The Federation of Trade Unions of Macau (FAOM), the largest worker's organization in Macau, is studying a proposed minimum wage rule that would prevent cheap imported labor.


CHASING THE DRAGON macaubusiness.com

In an interview with macaubusiness reporters, Steve Wynn mentioned regarding the Cotai project, he "wouldn't need any more tables than (what he has) in Macau." Currently, Wynn has around 400 tables in Macau.  Wynn said that if the government maintains its 5,500 table cap beyond 2012, he wouldn't build the hotel/casino on Cotai.  Meanwhile, Wynn has revealed that he refused to work with seven junkets because they failed a compliance examination.  “Every 90 days at our board meeting, Governor Miller, who is the head of our compliance committee, [presents] our latest report...We conducted fifty three investigations of junket operators, forty six of those junket operators were found acceptable and seven were not,” Wynn said.



GDP for 1Q 2010 rose by 30.1% in real terms, up from 27.4% growth in 4Q 2009. Gross gaming revenue soared 57.1% YoY in nominal terms and total visitor spending (excluding gaming expenses) rose by 14.3% YoY.

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Last week, 2 of the 8 risk measures registered positive readings on a week-over-week basis, while 4 were neutral and two were negative - a pretty balanced reading suggesting the jury is still out on whether concerns around Europe are subsiding or simply pausing before their next move. That said, last week 6 of 8 measures recorded worse readings sequentially, suggesting that this week's leveling out may be a positive on the margin from a second derivative standpoint.


One caveat is that our interpretation of the AAII Bulls/Bears survey is that a more bearish reading is bearish. Most market observers would use this survey as a contrarian indicator, which we wouldn't disagree with from a practitioner standpoint. However, for the purposes of this risk monitor, we treat an increase in bearish sentiment as a negative.


Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (30 companies).

2. High Yield

3. Leveraged Loans

4. TED Spread

5. VIX

6. Greek Bond Spreads

7. Markit Subprime Spreads

8. AAII Bulls/Bears Sentiment Survey



1. Financials CDS Monitor - Credit default swaps in Financial companies were mixed last week, a week of respite following major hikes over the last few weeks.  The largest decreases week over week were AGO, C, GS, and COF. Swap prices remain considerably elevated compared to a month ago, with the most widening at XL, ABK, GNW, and HIG. Conclusion: Neutral.

  • Widened the least vs last week: GS, C, COF, AGO 
  • Widened the most vs last week: XL, ABK, BBVA-ES, POP-ES
  • Widened the least vs last month: C, GS, SAB-ES, POP-ES
  • Widened the most vs last month: XL, ABK, GNW, HIG


2. High Yield (YTM) Monitor - High Yield rates fell 14 bps last week, remaining above their elevated levels preceding the Greek bailout. Rates closed the week at 8.97% down from 9.11% the week prior. Conclusion: Positive.




3. Leveraged Loan Index Monitor - Leveraged loans were flat last week, closing at 1464, the same point they went out the week prior. Conclusion: Neutral.




4. TED Spread Monitor - The TED Spread is a great canary. It rose last week closing at 37.1 bps up from 33.2 bps in the week prior. Conclusion: Negative.




5. VIX Monitor - The VIX is admittedly a far more coincident indicator, but we include it as a general reflection on the equities market. Last week the VIX closed at 32.07 down from 40.10 the week prior. Conclusion: Positive.




6. Greek Bond Yields Monitor - The Greece situation remains in flux and so we include Greek Bond 10-Year Yields as a reflection of that dynamic. Last week yields fell 20 bps to 762 bps from 782 bps. Conclusion: Neutral.




7. Markit ABX Index Monitor - The Markit ABX Index was generally flat/down vs the prior week. We use the 2006-2 series and look at the AAA, AA, A and BBB- series. We include this measure as a reflection of what is going on in deep subprime distressed paper. Conclusion: Neutral.



8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more Bearish on the margin vs last week. Bulls decreased by 11.5% to 29.8% while Bears rose 17.2% to 50.9%, putting the spread at 21% on the bearish side, versus 7.6% to the bullish side last week. Conclusion: Negative.




Joshua Steiner, CFA


Allison Kaptur


US equities finished lower last Friday, partly on Fitch’s Spain debt downgrade.  It’s truly amazing that the Fitch, Moody’s, or S&P ratings can still have this type of impact on the market.  After a long weekend, we are looking at growth slowing around the world and markets in a steep dive.


China’s Purchasing Managers’ Index slid to 53.9 from 55.7 in April that was less than the median 54.5 estimate in a Bloomberg survey.  Also, the Eurozone manufacturing PMI declined to 55.8 in May from 57.6 in April (also below an initial estimate of 55.9 released on May 21).  In early trading, the euro is trading down 1.3% to 1.2131.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.23).


Over the weekend, Germany’s president unexpectedly quit, making Germany less of a source of stability in the region.  The now former president, Horst Koehler, is also the former head of the International Monetary Fund.


This follows on the heels of some disappointing MACRO data points in the US last week.  Breaking a four-month upward trend, consumer spending failed to deliver in April; spending was flat versus expectations for +0.3% and personal income met consensus at +0.4%.  Also on Friday, May Chicago PMI was reported at 59.7; below consensus 61.0 and prior 63.8. The one bright-spot was the Final May University of Michigan Confidence of 73.6; slightly better than consensus 73.3 - the preliminary reading was 73.3.


On Friday, Financials (XLF), Energy (XLE) and Materials (XLB) were the three worst performing sectors, down 2.2%, 1.9% and 1.8%, respectively.  The XLE Oil services stocks (OSX down 5.2%), were the worst performing sub-sector on the day.   Late Friday afternoon, President Obama addressed the media from Louisiana, where he pledged the full force of the government in responding to the continuing oil spill and cleanup. The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.46) and Sell Trade (77.32).


The theme of slowing growth is negatively impacting China and commodity prices.  Over the last two days, China is down 3.3%.  In early trading today, copper and crude prices are down more than 2%.  The XLE and XLB will continue to underperform in this environment.    The Hedgeye Risk Management models have the following levels for COPPER – Buy Trade (3.02) and Sell Trade (3.20).    


In early trading, the dollar is trading up about 1%.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (86.49) and Sell Trade (87.51). 


The three defensive sectors of the S&P 500 outperformed on Friday - Consumer Staples, Healthcare and Utilities.  Large-cap Pharma, HMO’s and beverages were all sectors that rose on Friday. 


Despite more instability in the euro zone region, the VIX declined 20% last week.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (28.65) and Sell Trade (45.06). 


Gold has rallied 2.3% last week and is now up 11.3% year-to-date.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,194) and Sell Trade (1,231).


As we look at today’s set up for the S&P 500, the range is 50 points or 1.2% (1,076) downside and 3.4% (1,126) upside.  Equity futures are trading below fair value with the Dow back below 10,000 in reaction to further selling in global equities as global growth is slowing. 


On the economic front, to be reported today are:

  • May ISM Manufacturing
  • April Construction Spending
  • May Dallas Fed Manufacturing
  • API Crude Inventories
  • ABC Consumer Confidence

Howard Penney













Unchangeable Certainty

“The only unchangeable certainty is that nothing is certain or unchangeable”

-John F. Kennedy


It was a nice long weekend. A successful May is over. Let the performance scoring for June begin.


I’m using a JFK quote to kick start the month, not only because we need some American leadership in this country, but because the last time we saw stocks get crushed like we did in May was when Kennedy was the President of the United States.


Ironically enough, the US stock market locked in a cyclical peak on the exact same day (April 23rd) of both 1962 and 2010. So far, the peak-to-closing-trough decline from April 23, 2010 has been -12.3% (1067 SP500). The question for risk managers this morning remains, are the lows for 2010 in?


The best place to start answering this question is from the top down. To understand where we are going, we better have a deep respect for where we came from. Where are we relative to our Q210 Hedgeye Macro Themes? What’s working? What’s not? Market prices don’t lie.

  1. Sovereign Debt Dichotomy: Check, check, check. We thought Greece was the first domino of sovereign debt maturities that would concern the world; then Spain; then Italy and France. Both Spain and Italy implemented austerity measures late in May and over the weekend we saw France’s Budget Minister, Francois Baroin, admit that it was a “stretch” for France to maintain an objective AAA rating. With France’s burgeoning deficit, we concur.
  2. Inflation’s V-Bottom: Across the world, inflation readings hit a series of higher-highs sequentially for the month of April. Our Hedgeye Inflation Index turned down month-over-month in May. Inflation’s V-shaped recovery is what every 12 month chart you look at looks like until the music stopped on April 23rd. Inflation’s V is now setting up to deflate in June. This will help insulate the Fed’s Japanese style monetary policy, and keep treasuries relatively safe.
  3. April Flowers/May Showers: Check. One fund of funds investor from Boston had an interesting take on what we considered proactively predictable: “Attempting to manage risk in an environment where everything that could go wrong does go wrong seems like a fruitless endeavor.” For the month of May, the SP500 was down -8.2%. One manager utilizing the Hedgeye long/short strategy was up +4.05% gross. Another was up +0.52% net. We’ll call that fruitful.

No matter where you go this morning, there market prices are. Spain, China, and France are down -21.6%, -23.7%, and -12.9%, respectively YTD. Our task isn’t to make excuses or point fingers. Our risk management goal is to see the game for what it has become. Are the lows for 2010 to-date already a rear-view event? Unlikely.


We run a multi-factor risk management model across equities, bonds, currencies, commodities, etc., globally. There are very few things that are flashing cover/buy to us yet. Simplifying our model on the US Equity side of the ledger, these are the 2 lines that are most concerning to me:

  1. SP500 intermediate term TREND line resistance of 1144
  2. Volatility Index (VIX) intermediate term TREND line support of 22.19

Provided that the SP500 can’t breakout above 1144 and the VIX can’t breakdown through 22.19, the bear market in US stocks will continue to manifest into consensus that should find another short term cyclical bottom sometime in Q2/Q3.


Another 10 intermediate term TREND lines that remain broken around the world and across asset classes that compliment this simple 2-factor US Equity bear case:

  1. Shanghai Composite Exchange = 2933
  2. Tokyo Nikkei Average = 10598
  3. Hang Seng Index = 20789
  4. London Financial Times Index (FTSE) = 5511
  5. Spain Bolsa (IBEX) = 10499
  6. French CAC 40 Index = 3794
  7. Brazilian Bovespa = 66992
  8. CRB Commodities Index = 271
  9. Copper = 3.33/lb
  10. WTI Oil = $79.11/barrel

Nothing, of course, is “certain or unchangeable” in our risk management model. It’s grounded in chaos theory and, after all, that’s grounded in uncertainty.


My immediate term TRADE lines of support and resistance for the SP500 are now 1076 and 1126, respectively. Our asset allocation to equities, globally, remains zero percent. We continue to be short both the SP500 (SPY) and Nasdaq (QQQQ).


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



Keith R. McCullough
Chief Executive Officer


Unchangeable Certainty - May Showers

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