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The EU’s Unemployment Line-Up and a Flight to Safety

Position: Short France (EWQ)


1.       European Union Unemployment Rates


While unemployment is a lagging indicator, it is nevertheless a formidable metric that can tell quite a story about a country’s “health”.  While country statistical offices may have different measures for calculating employment, we’ve used Eurostat data below to present the high-low divergence that exists across Europe.  As we pointed out in our Q2 Theme call Bearish Enough on Spain?, a high rate of unemployment, especially among persons 18-35, can have significant longer-term TAIL implications on economic growth. Simply said, higher levels of unemployment beget lower levels of consumer spending and tax revenue; pile on government austerity measures, ie cutting spending and levying higher taxes (which we’ve recently seen from  Spain, UK, Italy, and Portugal) and we believe you have a cocktail that will push growth prospects further out on the curve (chart 1).


The EU’s Unemployment Line-Up and a Flight to Safety  - M1


We’d draw your attention to the Baltic countries in chart 2 below, in particular. Over the trailing 6 months based on most current readings, Estonia, Lithuania, and Latvia show some of the largest gains in unemployment rates.  While the Baltic economies account for only 0.5% of total European Union’s GDP according to IMF data, investment risk is embedded in the region’s continued leverage to western European mortgages and loans, especially Swedish banks, and is nevertheless not insignificant. Remember that the Baltic countries experienced some of the largest contraction in GDP last year. We have seen sequential improvement in GDP for these countries over the last 3 quarters off bombed out year-over-year levels, which has helped contribute to the outperformance of the underlying equity markets YTD, yet we’d caution that rising unemployment will eat into the region’s potential growth prospects.


One country that stands out in chart 2 is Germany. As we’ve noted in our recent work, the decline in German unemployment over the last months is decidedly bullish, however last week we sold our position in Germany due to the drag we expect from the continent’s debt-laden peers.


Another key take away from the EU unemployment divergences is that a one-size-fits-all monetary policy is clearly not working in the Eurozone.  This is a longer term structural negative for the Euro.  We believe that there will be increasing conflict between countries within the Eurozone as their economies recover at different rates (or don’t recover at all) as the monetary union continues to weaken due to a lack of political solidarity.


The EU’s Unemployment Line-Up and a Flight to Safety  - m2


2.       ECB Deposit Levels Ramp to Historical High


Although the Europeans in collaboration with the IMF issued their $1 trillion “loan” facility in early May, European capital markets continue to shake day-to-day. Data from the ECB today may confirm investor worries as banks in the Eurozone parked record levels of cash with the ECB. Overnight deposits totaled €320.4 billion yesterday versus €316.4 billion in the previous day (chart 3).


As the chart points out, the flight of banks to safety began with Lehman and the financial crisis blowing out in the Fall of 2008 and has continued since then. With Euribor heading to a new YTD high of 0.706% today, it’s clear banks are cautious on the road ahead. Our call remains that Greece is not an anomaly, but rather that the fiscal imbalances of much larger economies such as Spain, France, and Italy are next, followed by the USA in 3-6 months.


We’ve positioned ourselves to take advantage of weakness in European markets. We’re currently short France via the etf EWQ and have been short Spain (EWP) in our virtual portfolio this year.


The EU’s Unemployment Line-Up and a Flight to Safety  - M3


Matthew Hedrick



Plug The Hole! SP500 Levels, Refreshed...

If the SP500 breaks down and closes through its long term TAIL line of support (1077) in the next few days, there may not be enough hands in the West Wing to plug the pricking of America’s last giant bubble - the Bubble in US Politics.


In the long run, I’ll take that short term stock market pain for America’s long term gain. Government’s heavy hand in markets is creating some of the highest levels of market volatility we have seen in generations.


In the meantime, I’ll keep playing the game that’s in front of me, no matter how conflicted or compromised some of the rules of this game of government sponsored volatility has become. The VIX is up +1.3% here to 30.57 and has ominously held its immediate term TRADE line of support (29.86).


Ominous is as ominous does. As a reminder, there is no upside resistance in the VIX to the 45.31 level. That means that any breach of the 1077 line in the SPX has plenty of probability to wreak some havoc on market prices.


In terms of upside resistance, nothing has really changed so far here in June. As of this afternoon’s price, the SPX is around flat for the month-to-date and the immediate and intermediate term TRADE and TREND lines of resistance remain overhead at 1109 and 1144, respectively.


Homebuilder Hovnanian (HOV) is down -13% in response to a -17% decline in net orders and bearish commentary on May demand trends (post homebuyer tax credit expiration). We put out a note titled “Shorting US Housing” yesterday and, at the same time shorted Toll Brothers (TOL). After being bullish on housing since around this time last year, we are making a call to get out.


If you’d like to take a look at Josh Steiner and Allison Kaptur’s work on housing, please email Jen Kane at . Being bearish on housing right here and now is not even in the area code of what this market is currently focused on. Lack of focus doesn’t mean opportunities on the short side cease to exist.


We remain short the SPY and QQQQ.



Keith R. McCullough
Chief Executive Officer


Plug The Hole! SP500 Levels, Refreshed...  - S P

R3: Have’s and Have Not’s in the IPO pipe.


June 3, 2010


Many interesting call outs today. The usual about Toning shoes picking up mo... but GSI making a key acquisition, 2 doggies coming public bc they have to (Toys R Us and Prada), while another postpones – bc it should.





- Laundry at Kmart. When the going gets tough, get creative. Word has it that Kmart is testing a laundromat in one of its stores in Iowa.
Hedgeye Retail’s Take: While it seems a bit odd, the combination of shopping and doing laundry kinda makes sense from time efficiency standpoint – though it’s a stretch. Kill time shopping while laundry is cooking. Clearly SHLD is pulling out all of the stops here with yet another attempt to drum up same store sales. I guess where I struggle is figuring out who wants to haul their laundry to and from a Kmart/Sears store.


- PSS Toning.  PSS management noted that the company aims to have a multi-brand, multi price-point effort underway to offer a wide range of toning products over the next few months. On the high end, Saucony is expected to introduce a toning product while the Champion brand represents the company’s value priced offering (at ~$40). The company also noted early success with the selling of the mid priced Grasshopper GetFit sneakers, which were debuted on HSN and are a sub-brand of the company’s Keds division.


- More Toning. You tired of hearing this yet? SCVL noted that toning shoes, especially Reebok, remain in short supply and there is little sign of demand letting up in the near –term. Management went on to say that pricing remains stable at the high end (~$100), with vendors still setting the pricing in the market. The company expects to see more products coming into the market over the remainder of the year, including a “fitness” effort by Nike (based on Free).





TOY IPO – how are they going to sell this doggy? Lot’s of hope and prayer.... Here’s a story from the venerable NY Post on Toys R Us – meaning that it must be true. Per the Post, Toys R Us Owner KKR Has Been Pushing Analysts to Give Positive Assessments - Sources tell the NY Post that analysts felt "grilled and cajoled" about TOYS's valuation, making the analysts suspect they were competing for investment-banking business. Sources say that Bank of America (BAC) chose not to take part in the analyst interviews, thinking they might run afoul of a 2003 settlement between the SEC and most banks. Sources say that KKR has been similarly aggressive and pressurizing in other recent IPOs, and the article notes that KKR is not in danger of violating the law with such tactics, only the investment banks that are part of the pact are. The four banks underwriting the deal: Goldman Sachs, JPMorgan Chase, Bank of America, and Credit Suisse. <nypost.com>

Hedgeye Retail’s Take: There’s not enough room on this page for me to say what I really think about this. Sad. Truly sad.


WAG Off the Wagon: Walgreens Reversing 15-yr Old Policy and is once more Selling Alcohol - The store is once more selling beer and wine as it seeks to become a one-stop shop without damaging its family friendly image. Up until the mid-90's, the store had been one of the country's largest alcohol retailers. Alcohol and other beverages had comprised about 10% of sales. It stopped when the sales become cumbersome and time-consuming for staff. It now has a limited beer and wine selection in about 3100 of its 7500 stores. <wsj.com>

Hedgeye Retail’s Take: Makes sense…and a lot of it.


GSI Acquires Retargeting Solutions Company - GSI Commerce Inc. announced its Marketing Services division has acquired FetchBack Inc., a Tempe, Arizona-based provider of retargeting solutions for more than 500 advertisers. <sportsonesource.com>

Hedgeye Retail’s Take: GSI is one of the more important companies that many people have not ever heard of. The leading outsourced web-enabled commerce business buying a top ‘retargeting’ advertiser makes sense – knowing little else about the economics. The business is focused on the 98% of consumers that show interest in a company by visiting a site, but ultimately leave for one reason or another without transacting. This is one to watch.


Prada Considers IPO… Again - Prada SpA, buoyed by surging profit at the eponymous fashion label, is exploring options to revive an initial public offering, according to four people familiar with the talks. Prada, which has scrapped an IPO four times in the last 10 years, is considering a Hong Kong listing in addition to Milan. Prada has cut debt and opened new stores in Asia as the industry rebounds from the worst year on record. The strong rebound in the first quarter, which may continue through the end of the year, would make it an opportune time to consider an IPO. While Prada may hold an IPO as soon as this year, it’s more likely the firm will wait for stock markets to rise and sell stock in 2011. <bloomberg.com/news>

 Hedgeye Retail’s Take: Wing and a prayer. At least it’s better than Toys R Us going public.


UK Discount Clothier In No Rush on IPO After Postponement in February - New Look Group Ltd., the U.K. budget clothing retailer, said it has no immediate plans to revive its IPO after reporting an 18% profit increase driven by refurbished outlets and online fashion sales. New Look postponed an IPO in February. The 1,108-store retailer, taken private in 2004 by Permira Advisers LLP, Apax Partners Worldwide LLP and founder Tom Singh, cited “unfavorable” market conditions when it put off the IPO on Feb. 12. New Look has opened outlets in the Netherlands, Egypt, Poland and Singapore as well as larger-format premises in the U.K., and is expanding online overseas to drive profit.  <bloomberg.com/news>

Hedgeye Retail’s Take: Isn’t it fascinating to see how troubled companies are accelerating IPO calendar, while others that are more in control of their own destiny are postponing?


Wal-Mart's Apparel Woes - Apparel is Wal-Mart Stores Inc.’s perennial Achilles’ heel and the question remains whether it will ever be able to repair it. Even during the recession apparel lagged while food and areas such as consumer electronics soared. And the problem has only become more intense now that the economy has begun to recover and Wal-Mart’s competitors such as Target are closing the gap with clothing driving sales and profitability while Wal-Mart admitted its apparel sales were below expectations and continues to be a work in progress.  <wwd.com/retail-news>

Hedgeye Retail’s Take: Wal-Mart is already scaling back footwear, which is a solid move. Apparel is a less complex category from a logistical standpoint, but the abysmal track record for WMT is just flat-out embarrassing. WMT needs to buy Liz Claiborne, or some other down and out brand that holds massive brand-equity with middle America.


Sport Chalet Sees First Positive Comp in 11 Quarters - Sport Chalet's posted its first gain in comp store sales in 11 quarters in the fourth quarter ended March 28, thanks to favorable winter weather in Southern California that propped up winter prices. Same-store sales increased 5.7%, contributing to a 6.8% increase in sales to $90.2 million that reduced the net loss for the quarter. <sportsonesource.com>

Hedgeye Retail’s Take: The athletic space continues to beat to its own drum.


Cole Haan Gets Callout by Clinton and Obama - Cole Haan got a big boost from not one but two U.S. presidents during a World Cup event at the White House last week. President Barack Obama, along with Vice President Joe Biden and former President Bill Clinton, gave the U.S. World Cup team a big sendoff on Thursday before they departed for South Africa. Clinton took notice of the team’s Cole Haan caramel Caper shoes, a cap-toe oxford. “I want to join the team to get the shoes,” said Clinton, according to a transcript from the event. And the former president event made a point of showing them to Obama following the current president’s remarks. “Those are nice-looking shoes,” said Obama, who has regularly worn Cole Haan, including on his inauguration day. “This is the best-dressed soccer team I’ve ever seen.” Cole Haan reps said they are excited about the buzz surrounding the shoe. <wwd.com/footwear-news>

Hedgeye Retail’s Take: This might seem insignificant, but it actually matters. I still struggle with why Nike still owns Cole Haan, but I guess press like this helps the cause.


Berkshire Cites Strength in Fruit of the Loom as Driver of Other Manufacturing Business Profit Growth - Berkshire Hathaway said pre-tax earnings in its Other Manufacturing businesses jumped 89% in the first quarter to $332 mm. The gains were driven by higher profits in its apparel businesses, Fruit of the Loom (FOL) in particular.  <sportsonesource.com>

Hedgeye Retail’s Take: It’s been a while since Berkshire called out FOTL as a profit growth driver. We don’t think they are gaining outsized market share, which is a likely positive read through for HBI, which continues to have top line wind at its back this year.


Another Promotion for Golfsmith - Just months after Phil Mickelson's Masters win resulted in Golfsmith giving away a $1 million in golf clubs, Golfsmith said it is teaming up with TaylorMade and a trio of golfers, Retief Goosen, Sergio Garcia and Sean O'Hair with a new national promotion tied to the U.S. Open Golf Championship.  <sportsonesource.com>

 Hedgeye Retail’s Take: The last promo was geared towards unloading excess inventory. This time it is about promoting growth in the category.




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ISM: What's Next For This Chart?

In macro, particularly when it comes to probability weighing mean reversion, pictures are often more powerful than prose.


When I look at this 3-year picture of the most important part of the US economy (the non-manufacturing base of business), this is what I see:


1.       A reading of 56 or higher (the red line) = unlikely

2.       A sequential continuation of positive momentum in the V-shaped recovery from the lows (the green V) from here = unlikely

3.       A sequential slowdown from this month’s reading of 55.4 (the blue line) = likely


What never ceases to amaze me is how Wall Street analysts come to consider the unlikely, likely.


The sell-side consensus for the May ISM non-manufacturing reading was 55.6. That estimate implied a higher-high, not only for this stage of the cycle, but beyond the highs of one of America’s most levered up economic cycles (2007).


With all of Asia and Europe slowing, what’s next for this chart? Our bearish positioning and answer to this question are also both implied. US economic growth will slow within 3-6 months; that’s if it’s not slowing here already.





Keith R. McCullough
Chief Executive Officer


ISM: What's Next For This Chart? - ISM Non Manufacturing

KSS: Validating Read on PSS

Datapoints continue to trickle out that validate our view that PSS operating momentum is misunderstood.



For anyone that cares on PSS (which you should) KSS was one of the more notable callouts this morning. KSS said that the Northeast and Southeast were the strongest geographies and that Footwear achieved the strongest comp.


Looking back to PSS comments on Tuesday night, the company noted weakness came from California and Southwest. We've since run the math on PSS store weightings by state, and it is definitely overindexed to the economies that were weaker during the month.


In addition, take a look at the KSS website at its footwear offering. What's new? Toning. Check out the images below. Several best sellers are web-exclusive. KSS also noted 50% growth in e-commerce.


Not a coincidence.


What do I like the most here? PSS will up its ante by 3x in 'Toning' in 2H. KSS is supporting price points as high as $115, and is commanding $40 for even simple thong sandals.  PSS has plenty of room to go with price point given that its company avg price point is in the teens.


KSS: Validating Read on PSS - p1


KSS: Validating Read on PSS - p2


KSS: Validating Read on PSS - p3


KSS: Validating Read on PSS - p4


Consistent with the trend year to date, claims remain in their ~450k range, too high for unemployment to improve meaningfully. This morning the reported number fell 10k to 453k, down from last week's revised print of 463k (revised up 3k), but roughly in line with consensus for 450k. Rolling claims climbed 1k to 459k week over week.  Remember, we need to see initial claims fall to a sustained level of 375-400k in order for unemployment to fall meaningfully and, by extension, lenders' net charge-offs to return to normalized levels.  We remain well above that level.  


As a reminder around the census, May was the expected peak employment month. Starting now, the census will become a headwind for job creation.  






The following chart shows the census hiring timeline.  If the past two cycles are an appropriate model for this year's census, we should start to see Census employment draw down as we move further into June, creating a headwind for employment. 




Joshua Steiner, CFA


Allison Kaptur

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