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An Employment Gong Show

Conclusion: Employment “growth” is anemic and looks weak going forward, which will be a negative catalyst for equities.


Today’s underwhelming Employment report was no doubt made worse by Goldman Sachs Chief Economist Jan Hatzius’ lofty forecast of +600,000 payrolls for the month of May (a +100,000 increase from his previous estimate). While being “a little low on the census contribution” was his chief reason for upping his forecast far above the median consensus estimate of a 536,000 gain, our Hedgeye estimate was that he (and consensus) was “a little too high” on the private contribution. Jan’s estimate was for an incremental 150,000 private payrolls to be added in May vs. 180,000 consensus.


Private payrolls added for the month of May was reported at an anemic 41,000 – first marginal deceleration since December of 2009. After a 9% drop in the S&P throughout the month, and a near 11% drop from the highs of April to the end of May, it was proactively predictable that the rate of job growth would slow on the margin. For clarification, the S&P 500 and Net Private Payrolls have a 0.72 positive correlation over the last three years. That’s an r-squared of 0.53, which suggests some level of statistical significance.


Interestingly, if we normalize for the birth-death adjustment, which we admit is the fodder of conspiracy theorists, and exclude the 215,000 birth-death adjustment, the economy actually lost 226,000 jobs.  Even if you aren’t willing to accept that dire of a claim, those unemployed longer than 27 weeks hit a new record coincident with this report at 46%.  The likelihood that people just give up hope and drop out of the workforce increases every week with that statistic.


We shorted the QQQs into the close yesterday based on the view that this payroll number was going to be worse than expected.  While Hatzuis’ took the shot, and we admire him for that at least, by inflating the whisper consensus number, he actually increased the probability that we would be right on our short call and that payroll additions would be worse than expected by implicitly increasing consensus expectations.


While consensus hiring is boosting over all payroll additions and, temporarily, decreasing the unemployment rate, this payroll report should be framed for exactly what it is . . . a disaster.  As we’ve highlighted in the chart below, this is a sequential decline in the addition of private sector jobs and highlights two critical points: a) this is a jobless recovery at best and b) the stimulus package has failed to stimulate any real sustainable jobs additions. 


With the stimulus behind us and census hiring also primarily in the rear view mirror, it is likely that the payroll additions will continue to be anemic, and that the actual unemployment rate ticks back up.  And that, as they say, is not good.


Daryl G. Jones

Managing Director


Darius Dale



An Employment Gong Show - US Net Payroll Addtions

R3: M&A Batting 0.455


June 4, 2010


11 notable items this morning. 5 are about M&A. Buckle up folks…





- In the past we’ve mentioned social media and the internet as a tool for further democratization of the fashion world. Now it appears companies, such as Levi’s, are using Facebook as an open casting call for it’s next “Levi’s Girl”. The company is accepting short video submissions via a Facebook app to find someone to interact with the company’s female consumer, via social media.


- The plastic bag continues to fade into history with the latest legislation from California attempting to ban the distribution of plastic bags at pharmacies, grocers, c-stores, and liquor stores. If passed by the state Senate, the bill would be the first, but likely not the last state to ban the distribution of disposable plastic bags. Score one for the environment.


- The funding spigot continues for online “flash sale” start-ups, with HauteLook scoring $31 million from Insight Venture Partners. With excess inventories dwindling across the luxury space, we see how it makes sense for the company to use some of its beefed up balance sheet to venture into additional categories. However, we do wonder how all these sites can survive having been founded on luxury apparel and accessories, only to venture into sales of Omaha Steaks and discounted hotel rooms.


- Interesting how on the same day Wal-Mart gets flack on greater depth on its gender-discrimination issues than previously disclosed, it also gets some welcomed press on opening banking operations in Canada and looking at acquisitions in Asia. Nice deflection!


- WMT Clarification: Some newswires are noting that WMT has an analyst day today. Note that October is the real analyst day.  This event is the annual shareholder meeting in which they have a q&a with analysts at the end of the day. Historically been a non-event, as annual forecasts related to store growth, capex, and other initiatives take place in the Fall.






LaHockey: Owner of Bauer Hockey Acquires Lacrosse Manufacturer - Kohlberg Sports Group Inc., the owner of Bauer Hockey, has acquired Maverik Lacrosse, the manufacturer of lacrosse equipment, apparel and accessories. John Gagliardi will remain CEO of Maverik Lacrosse. <sportsonesource.com>

Hedgeye Retail’s Take: One low-margin product plus another low-margin product = yes, you guessed it…a company selling two low margin products.


Remington Arms Co Takes 75% Stake in Mountain Lifestyle Clothing Company - Remington Arms Company, Inc. has bought a 75% stake in Mountain Khakis, LLC in a deal that will accelerate product development at the Charlotte, NC-based maker of mountain lifestyle clothing while expand Remington's foothold in the outdoor lifestyle market.  <sportsonesource.com>

Hedgeye Retail’s Take: This makes  a little bit of sense. A hard goods manufacturer moving into apparel tends to be best done when it is acquired – if history is any example. But then again, gun sales are in a cyclical slump right now. Acquiring from a position of weakness is never good.


UK Indie Department Store Acquires Bankrupt Company - Indie department store group Beales has acquired Robbs of Hexham from MCR, the administrator for beleaguered indie department store group Vergo Retail, for £250,000. <drapersonline.com>

Hedgeye Retail’s Take: I’ve never heard of either of these companies. M&A is really gaining steam – especially with smaller companies in consumer.


Foot Locker Bid Speculation Drives Shares at JJB Sports - Shares surged in JJB Sports yesterday after speculation that US sports footwear giant Footlocker could make a play for the sportswear retailer. <drapersonline.com>

Hedgeye Retail’s Take: Huh? This would really shock me if it came to fruition. There’s a whole lot of wood to chop in the base business here with Foot Locker. Also, its presence in Europe is that of a Pan-European retailer with an American feel. It’s expertise is certainly not in micromanaging markets like JJB tries to (and stinks at). If FL did this deal – which we don’t think it will – then we’d be very concerned.


WSJ Anti ANF: WSJ recommends against Abercrombie & Fitch - A "Heard on the Street" column notes the brand is doing well in Europe, but warns that since it runs its own stores, history would suggest that Europe won't become a gold mine for it. And even if Europe does become a gold mine, it is not clear that the gold will fill the sinkhole that the US is set to be for the next few years. At 21 times EPS, the column recommends against holding the shares in hopes of an eventual recovery in US sales. <Wall Street Journal>

Hedgeye Retail’s Take: The WSJ is actually sniffing down the right path.


Retailers in California Make Settlement - The Center for Environmental Health has reached a $1.7 mm settlement with more than 40 retailers, including Macy’s Inc., J.C. Penney Co. Inc. and Saks Inc., and distributors in a lawsuit that sought to reduce the amount of lead in handbags and other accessories. Payments from each defendant average $45,500 to $48,000, with the bulk consisting of legal fees in the $30,000-plus range. <wwd.com/business-news>

Hedgeye Retail’s Take: Not financially meaningful, but definitely interesting from a consumer vantage point.


Zappos Founder Talks Business, New Book, and Amazon - Hsieh, 36, talks about his new book being released Monday, titled “Delivering Happiness: A Path to Profits, Passion and Purpose.” Discussing the Amazon deal, "We think of Amazon as being the replacement to our board of directors and as a giant consulting company with free access for us. It’s up to each [Zappos] department to decide how much to tap into that." Hsieh say Zappos is moving faster than ever with better warehouse capabilities. According to Hsieh, Amazon has kept their promises. Most of Zappos's business is still concentrated on footwear (80% to 85%), but they are making a big push in other categories, especially apparel which is 10% to 15% now. Apparel was up almost 50% in 2009. <http://www.wwd.com/retail-news/?module=tn>

Hedgeye Retail’s Take: This dude is one of the few CEOs I follow on Twitter. Sometimes a loose cannon…but always interesting perspective on the evolution of the business.



The Macau Metro Monitor, June 4th, 2010

SANDS CHINA TO POST US $1.0-US$1.2BN IN ADJUSTED EBITDA IN 2010 macaubusiness.com

CEO Adelson said yesterday that Sands China could generate between $1.0 to $1.2 billion in adjusted EBITDA in 2010.  He added that LVS could generate on a consolidated basis as much as US$3.0 billion of adjusted EBITDA in 2011.

Meanwhile, on CNBC, Adelson remains optimistic on the Las Vegas market and is interested in the Japanese market.



Foreigners with only tourist visas will no longer be allowed to work in Macau, the Department of Foreign Affairs (DFA) said Friday.  Under the new law, jobs in Macau will be available only through direct hiring in the Philippines, or through a legitimate agency in the Philippines connected to a legitimate Macau employment agency.



Beginning 8/1/2010, Visa will block holders of Chinese dual currency credit cards that bear both Visa and UnionPay symbols from using the China UnionPay service when they travel overseas, including to Macau and Hong Kong. This move will result in Chinese mainland consumers paying a 1 to 2% money-exchange fee and exposing them to various FX risks.


Sources in Macau are skeptical Visa will go through with this change as it will hurt tourism.  “The dual currency credit cards [Visa and China UnionPay] have become very convenient, especially considering that there are still many restrictions for mainland tourists to take money when they travel to overseas destinations.  I don’t believe that this move will come into effect,” a source close to the local banking supervision body told Macau Daily Times.


“UnionPay will continue to expand business overseas, improve services and strengthen international cooperation … with strong support of our member institutions,” UnionPay said in response to the media reports.


Paulson & Co will provide a cash infusion of $351 million for $532 million debt owned by a Harrah's subsidiary. Harrah's owners Apollo Management LP and TPG Capital LP will put in about $200 million into the company to buy $303 million debt from the Harrah's subsidiary. The companies together will exchange that debt for 15.6% equity in the company.


Harrah's CFO, Jonathan Halkyard said,  the total cash investment of around $550 million  would allow to Harrah's to pursue international opportunties, particularly in Macau.  "Macau remains our first, second and third priority," Mr. Halkyard said.

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The S&P 500 finished higher (up 0.4%) on Thursday, but the move was choppy and unconvincing.  The RISK trade continues to outperform, but the underlying risk factors don’t support the move as volatility continues to reflect the heightened uncertainty surrounding a number of key MACRO drivers for stocks.


Some of the unsettling factors are:


(1)    Volume declining sequentially for three straight days.

(2)    Negative Advance/Decline line.

(3)    VIX declined yesterday, but is in a bullish formation.

(4)    The DXY is up, Euro down.

(5)    Copper is down for four straight days - Broken on TRADE and TREND.

(6)    China is still in CRASH territory.

(7)    Hedgeye RM sector studies are bearish

(8)    Three-month LIBOR has risen to 0.5378%

(9)    Although it has come in today, the TED spread has widened considerably this week


The potential contagion from the fiscal pressures in countries throughout Europe will continue to plague the financial sector.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.21) and Sell Trade (1.23).  The Financials (XLF) was one of two sectors that declined yesterday.


The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.52) and Sell Trade (87.63).  The VIX declined by 2.3%, but still remains in a bullish formation.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (29.11) and Sell Trade (41.12). 


While the CRB rallied by 0.83% yesterday, the impact from China's efforts to cool an overheating property market and the earnings hit from the Gulf of Mexico moratorium may not completely factored in to commodity demand, which may suggest further downside.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (72.20) and Sell Trade (76.12).


The Materials (XLB) sector was the worst performer yesterday and the other sector that declined alongside the Financials (XLF).  China seemed to be one of the bigger drivers of today's pullback in the industrial metals and related equities.  Yesterday, Copper declined 3% and is looking down for four straight days.  Copper is now down 9.7% year-to-date.  The Ag chemicals group also came under some pressure today with CF (3.5%) and MOS (3.4%) among the worst performers.  A notable divergence in the REFLATION trade was the Energy sector (XLE), which caught a bid as crude rose 2.4%.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.95) and Sell Trade (3.03). 


A notable standout to the upside was Technology (XLK); the software group was one of the bright spots in the sector.   The Internet group also fared well with EBAY +4.4%, GOOG +2.5%, YHOO +1.7%, and DELL +4.9%.  Dell Inc. Chief Executive Officer Michael Dell said he has considered taking the company private.  After rallying more than 3.5% on Wednesday, the semi group finished higher again today with the SOX +1.2%; the semi-cap equipment names were among the best performers in the group.


Looking at the Hedgeye sector models, the Consumer Discretionary (XLY) remains the only sector that is positive on TREND, although the underlying names are running into a brick wall.  Yesterday’s May same-store sales data did not seem to provide any meaningful overall direction for the S&P Retail Index, which underperformed.  The Thomson Reuters same-store sales index rose 2.5% in May vs. consensus expectations for a 2.6% increase. While total comps came in below expectations for a second straight month, a number of companies noted a pickup in sales in the back half of the month stemming from better weather.


The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,202) and Sell Trade (1,237).   


As we look at today’s set up for the S&P 500, the range is 34 points or 2.3% (1,077) downside and 0.7% (1,111) upside.  Equity futures are trading above fair value after posting their first consecutive gain in over a month with investors poised for May's nonfarm payrolls due at 08:30am.


On the economic front to be reported today will be:

  • Euro zone Q1 preliminary GDP +0.6% y/y vs. consensus 0.5%
  • US Nonfarm Payrolls (May) consensus 500K
  • US Private Payrolls (May) consensus 175K
  • US Manufacturing Payrolls (May) consensus 35K
  • US Unemployment Rate (May) consensus 9.8%
  • US Average Hourly Earnings MoM (May) consensus 0.1%
  • US Average Weekly Hours (May) consensus 34.1

Howard Penney













The World As It Will Be

“No sensible decision can be made any longer without taking into account not only the world as it is, but the world as it will be.”

-Isaac Asimov


Isaac Asimov was a Hedgeye type of thinker: multi-factor + multi-duration, and ample storytelling to synthesize both.


Asimov was a Russian-American scientist (professor of biochemistry at Boston University) but also a renowned science fiction writer. He built a base of understanding in the accepted sciences of the world before he stepped out onto the edge to consider the “world as it will be.”


“The world as it is” perceived to be isn’t very difficult to discern this morning. Everyone with a market quote is hanging on whether or not the US unemployment rate will be terrible or toxic. Goldman got everyone hopped up intraday yesterday that we won’t see a 10% handle on the unemployment rate – isn’t that comforting.


Unfortunately, “the world as it will be” after a cyclically adjusted (for census workers) employment report won’t change. Like Japan, America has laid down the structural trolley tracks for what our healthcare analyst, Christian Drake, calls Destitution’s Duration. That is, the percent of unemployed in America for 27 weeks or more which continues to make higher all-time highs. At the same time, the percentage of Americans living on food stamps continues to push to higher-highs as well.


The bulls may very well enjoy the headline of a 9-percent-something unemployment rate that gets trumpeted by the willfully blind. However, after the first hour of trading, every prop desk in America will have sucked what they could have out of our Government Sponsored Game of Volatility and will prepare for the weekend. No sensible intermediate term decision can be made without considering this world’s debt, deficit, and employment problems as they will continue to be.


Because CNBC is mesmerized by a made for American TV 830AM manic countdown, what’s going on in the rest of the world this morning certainly doesn’t cease to exist. So let’s strap on the global macro pants and take a walk down that path:


1. Japan – After becoming the 5th said leader of Japan since 2006 (how embarrassing is that?), newly elected PM Kan said: “First and foremost we must gain the public’s trust. I want to help the party break through Japan’s frustrations.” Isn’t that inspirational? Japan remains the precedent that Ben Bernanke and the Fiat Fools continue to be willfully blind to. “The world as it will be” with Japanese style monetary policy in America and Europe will not be good.


2. China – After making a fresh YTD low yesterday, the Shanghai Composite rallies a whole 4 basis points last night. Instead of being down -22.1% year-to-date, China’s stock market is down 0.04% less than that. “The world as it will be” according to this major economic leading indicator is one of slowing global growth.


3. Spain – After attempting to convince its citizenry that austerity measures are good, the professional politicians in the land of the 20% unemployment rate are looking forward to massive demonstrations early next week. Spain’s IBEX index is flashing a negative divergence versus European equity markets again this morning, trading down another -0.58% to -22.8% YTD. “The world as it will be” when you plug your social net with wage cuts and taxes will not be good.


4. Hungary – After hoping that no one in Europe would notice, finally the President of the European Commission, Jose Manuel Barroso, who presides over 26 other political professionals (commissioners of 3 hour lunches) in the European Union, called Hungary’s burgeoning deficit/GDP “a very delicate situation.” At least these guys are starting to see what they are no longer allowed to ignore. “The world as it will be” is one with a long term sovereign debt default cycle.


5. Copper – Dr. Copper has been making a series of lower-lows as global equity markets Buy-And-Hope ahead of this employment report. Iron ore inventories ramped another +2.1% week over week in China and copper’s price has broken our long term TAIL of support line of $3.03/lb. At $2.97/lb this morning, copper prices are down -4.5% week-over-week. “The world as it will be” according to this major global macro leading indicator is one of slowing industrial demand.


6. Fed’s Balance Sheet – After telling Ron Paul that he was going to “cut the Fed’s balance sheet to $1 Trillion dollars”, ole Heli-Ben has done nothing but Pile Debt Upon Debt. This week, the Fed’s balance sheet expanded by another $2.2B to $2.34 TRILLION DOLLARS. Bernanke continues to buy the toxic waste that is US mortgage backed securities. Watch what this man does, not what he says. “The world as it will be” with the US as the Global Debtor nation will not be good.


On that cheery note, enjoy the manic media’s coverage of the US employment report and have a great weekend.


My immediate term support and resistance levels for the SP500 are now 1077 and 1111, respectively. We invested 3% of our bulging cash position in gold yesterday (gold was down), taking the cash position in the Hedgeye Asset Allocation Model down from 76% to 73%.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The World As It Will Be - Unemployment Fed Funds Rate

A Look Into May

A mixed bag for the month of May, but plenty of nuggets below the headlines worth highlighting.  Notably, business picked up across the board over the final week of the month for most retailers.




May sales are old news by now, but as with any month there’s a fair amount of company-specific detail that should not go overlooked.  In aggregate, a few themes emerged from the month.  First, business almost universally picked-up over the final week of the month, with most retailers citing a return to favorable (i.e warm) weather as a driver of apparel and seasonal sales.  Second, California was oft-mentioned as one of the weaker regions for the month.  Most retailers cited unseasonably cool and wet weather as the culprit, but is something bigger looming in one of the weakest (financial) states in the Union?  Finally, home categories stood out as the most consistently positive product areas across a wide range of distribution points.  With the Memorial Day calendar shift aiding most retailers and the early read on a better start to the month, it’s fair to expect a meaningful pick up in absolute results come next sales day. 


Additional highlights/lowlights:

  • Target noted that groceries and HBA were strong categories for month, increasing by mid to high single digits.  Apparel was also above average, driven by footwear and ladies.  Notable weakness occurred in the electronics category, which was “well below the company average”.  Comments on electronics are consistent with Costco’s recent commentary which suggested promotional activity in flat panel TV’s remains limited, which in turn is impacting demand. 


  • ROST continues to report exceptional strength in the dress and home categories, both of which increased by a mid-teens percentage for the month.  From a regional perspective, there was a wide range of performance amongst key states.  California registered a disappointing month, down 1% vs. Florida/Southeast which posted a high single to low double digit increase.  Management believes cool and wet weather during the month had a disproportionate impact on CA results. 


  • Kohl’s is awarded the e-commerce growth of the month award after registering a 50% increase in online sales.  This is consistent with Q1 trends and with management’s previous commentary on the growth potential for the .com business.  Recall, that infrastructure investment to support online growth is a key focus in 2010. 


  • While JWN did miss Street expectations, it is worth noting that the timing of the company’s Half-yearly sale did negatively impact the month’s results by 350-400 bps (amongst the highest calendar impacts of any retailer for the month).  As a result, the true measure of whether or not momentum is slowing at JWN cannot be measured until June is complete.  Jewelry, dresses, and men’s shoes were top performing categories for the month. 


  • While maybe more of a moral victory than anything else (given overall same store sales decreased by 1.8%), JCP noted that men’s apparel was the leading merchandise category for the month of May.  Management attributes this outperformance to changes the company has made in the merchandising and marketing of the category. Recall that men’s remains a key area of focus and was one of the focal points at the company’s recent analyst day.  E-commerce is also a top priority, however it continues to lag its peers, posting only a 3.1% increase for the month. 


  • Contrary to most retailers which saw a pick-up in business over the final week of the month, Abercrombie noted that sales were weaker over the second half of the month.  Management attributes the weakness to the Mem Day calendar shift and difficult compares with a summer clearance event last year. 


  • Costco noted that it is beginning to see very slight signs of inflation of the meat and produce area.  For the month, average prices for beef and pork were up, while chicken was down slightly.  Deli and frozen food also showed slight inflation.  Other standouts include softline sales, which were up in the mid-teen range for the month. Strength was driven by housewares, home furnishings, small appliances, domestics, and jewelry. 


  • Mark your calendars for the annual Aeropostale back to school line preview on July 14th.  We expect to see many positive sell side notes following the event, as this has become standard practice over the years.  How much do denim, hoodies, and graphic tees really change in one year?  


  • Keep an eye on June results for American Eagle, which will highlight the company’s efforts to clear slow selling merchandise in advance of the arrival of the company’s first back to school floorset on July 10.  Recall that AEO is betting heavily on denim and will likely need a material acceleration in same store sales to keep inventories in a favorable position relative to sales. 


  • With better than planned sales and substantially lower inventories year over year, The Limited is planning a substantial reduction in the number of days in BBW’s semiannual sale.  The event will be 10 days shorter this year, which is expected to negatively impact June comps by 7-10 points.  Overall, LTD continues to highlight substantially higher margin rates as the company has taken inventories down substantially across both brands. 


  • The Buckle noted that denim was a leading positive category for both men and women during the month.  On the flipside, footwear was one of the weaker categories.  While not a major driver of the overall business, the weakness in footwear is notable given the category’s strength across most other mall based retailers. 


  • TJX reported a notable divergence in the performance of the company’s apparel and home business.  Within the core MarMaxx division, apparel sales increased by 2% vs. an 11% increase in the home category.  Management noted that it believes home categories tend to outperform when unfavorable weather tends to impact apparel sales.  Overall, the trend in the strength of the home categories was consistent across most retailers during the month.


 - Eric Levine



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20 Proprietary Risk Ranges

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