Forecasts Revisited: Germany vs USA

Position: Short France (EWQ)


Germany’s Bundesbank raised growth forecasts for the country in its bi-annual economic outlook report today, calling for +1.9% this year (versus a previous estimate of +1.6%) and +1.4% in 2011 (versus +1.2%). For comparison, Bloomberg’s average GDP forecast for Germany is +1.8% in 2010 Y/Y and 1.7% in 2011.


We agree with the report that inflation levels will likely be moderate over the medium term, despite the Euro’s depreciation, and that exports may get a boost from a weak Euro and improving global demand.


However, we’re cautious on the contagion threats from sovereign debt default across Europe. As we’ve pointed out in our Q2 quarterly theme work, investment risk related to sovereign debt default or restructuring is not limited to Greece, but will spread to Spain, France, and Italy, much larger economies than Greece with significantly higher levels of debt exposure to European banks, especially in Germany.  


Flipping to the other side of the pond, we think that growth estimates for the US, like Germany, may be lofty.


At the Federal Budget Committee hearing on Wednesday, Fed Chairman Ben Bernanke forecast 3.5-4% GDP growth in 2011. For comparison, Bloomberg’s average GDP forecast for the US is +3.2% in 2010 Y/Y and 3.0% in 2011.


Keith wrote the following comments in response:


“So Ben Bernanke is not only forecasting a higher level of US growth than the Bloomberg consensus for 2011 but now more than a DOUBLE of the Bundesbank’s forecast for Germany in 2011!


With both pending US deficits and debt maturities demonstrably higher than Germany’s, we have a very hard time comprehending the world Bernanke sees coming in 2011. Much like our differences in forecasts versus Bernanke’s in 2008 this, unfortunately, remains a consistent divergence of analytical opinion.”


Tack on a jobless recovery that could run out of stem in 2H10 and headwinds facing the consumer coming down the pike – including housing – and it’s easy to see why Bernanke’s Bet might be a bit too aggressive.


Matthew Hedrick

1-Day: SP500 Risk Management Levels, Refreshed...

It’s certainly been an interesting week for the SP500:

  1. Monday – lowest-closing-low for the YTD at 1050 (down -13.7% from the 1217 peak)
  2. Tuesday – bear market rally of +1.1% to 1062
  3. Wednesday – failure to follow through on Tuesday’s lift, closing down -0.6% at 1055
  4. Thursday – massive +3% price squeeze on low volume to 1086

And after another 1-Day rally, the US stock market sells off once again to 1081 as of 230PM EST…


What do we do from here?


Stay short, watch, and wait.


The long term TAIL line for the SP500 is 1081. This line deserves the bearish benefit of the doubt until it doesn’t. There is significant immediate term downside to this Buy-And-Hope market simply because consensus is not yet Bearish Enough.


When 1-Day rallies stop empowering the perma-CNBC-bulls to actually cheer themselves on, this will change. Until then, 1-Day rallies should be taken as selling opportunities, not opportunities to hope-up a mini-bull market that is freshly broken.


We see no support for the SP500 down to the dotted green line in the chart below at 1039. That’s -4% downside from here versus immediate term upside to 1103 (2% upside). When risk outruns reward 2:1 and we have a bearish fundamental macro view, we’ll remain short the SPY.


Enjoy France vs. Uruguay.



Keith R. McCullough
Chief Executive Officer


1-Day: SP500 Risk Management Levels, Refreshed...  - S P


The role of Disposable Income in elections is considered by some the only reliable predictor of elections.  If people are hurting, they take their anger out on incumbants.  Compared to 1994, President Obama is lagging what was then an unthinkable Republican House takeover. 


Not that Obama needs any more trouble but the opposition effort to turn the Sestack Jobsgate failed.  I think they will try again.  Scandal typically hunts a President in his second year in office.  I guess it takes that much time to dig something up by the opposition.  Maybe the Elliot Spitzer scandal was just Republican legislators good fortune, butt does seem odd that the "steamroller" Governor was caught in March of 2008, in his second year in office. 


The turn to Deficit Hawkishness that seems to be bubbling up from the White House is maybe a pre-emptive move toward support.  That is not a good turn for healthcare.  A tougher stance on deficits and healthcare spending is not a good scenario.  Particularly, if the cost savings initiatives I heard about yesterday are being widely adopted.


The conclusion appears to be that while cost savings are already being sought in this difficult operating environment, expect more if the Obama's move toward the Deficit Hawks.  Given what Disposable Income is suggesting, he'll have to get very hawkish.


Thomas Tobin

Managing Director





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R3: Blackhawks Exposure Revealed


June 11, 2010


In light of the city’s first Stanley Cup in 50-years, we decided to take a quick look at which retailers are over-indexed to the Chicago market.





While hockey merchandise sales are not typically a key driver for athletic and sporting goods retailers, we decided to take a quick look at which retailers are over-indexed to the Chicago market in light of the city’s first Stanley Cup in 50-years. Using the population of Illinois relative to the total U.S. at 4.2%, we can see which retailers are over and under indexed to the Windy City. As the chart illustrates, the primary beneficiaries are Athlete’s Foot, The Sports Authority, Finish Line and Dick’s. While Wednesday night’s victory is likely to impact the sale of jerseys and t-shirts, we don’t expect the Blackhawks victory to have a meaningful impact on public company sales in Q2.  However, the Cup could be and added bonus for TSA’s forthcoming IPO. 


R3: Blackhawks Exposure Revealed - 1





- Lululemon noted that its class of stores opened in new markets toward the tail end of 2008 were real stand-outs when compared to the overall average comps for the quarter. These stores outperformed the reported 35% increase on a constant dollar basis. Management attributes the outperformance to traffic, which is in part driven by growth in brand awareness over the past 18 months.


- A survey from Compete suggests online coupon usage has a meaningful impact on retailers’ results. About 57% of consumers who used a coupon code on their last online purchase indicated they would not have made the purchase if the coupon was not used. Coupons also seem to have meaningful ROI impact, with those using coupons spending an average of $216 vs. $122 for those without coupons. Bottom line, keep the coupons coming.


- Add Radio Shack to the list of retailers this go around that will be selling the iPhone 4 at launch. Recall that the prior release of the 3GS was confined to Best Buy, Apple, and AT&T. To sweeten the deal, The Shack will also give consumers a trade-in credit for their old iPhone. Score one for the Shack!





UK Branded Market Bouncing Back While Independents Lose Share - The branded market could be ripe for a resurgence after figures showed the 2.5 year trend for declining sales in the sector has come to an end. Independents have borne the brunt of the decline in the branded fashion sector, notching up the biggest market share declines in the clothing and footwear markets so far this year. <>

Hedgeye Retail’s Take:  Not surprisingly the larger, better capitalized companies are taking share while the little guy loses.  Nothing new here except that bounce of the bottom seems to be following a pattern similar to recovery we’ve seen stateside. 


Rating Agencies Upgrade Neiman Marcus, Hold Barneys New York - Neiman Marcus Inc. got a thumbs-up from one ratings agency Thursday, while Barneys New York Inc. received a less flattering assessment from another. Moody’s Investors Service upgraded Neiman’s corporate family rating to “B3” from “Caa1” based on a “solid recovery in credit metrics,” while Standard & Poor’s Ratings Service took Barneys off CreditWatch without changing its “CCC” rating. However, S&P lowered its issue-level rating on Barneys to “CCC-minus” from “CCC” and lowered its recovery rating to 5 from 3 “based on our view that the company’s valuation has diminished over the past few years.” Barneys was placed on CreditWatch with positive implications on April 22. <>

Hedgeye Retail’s Take:  Nothing like a rearview ratings change for the luxury leaders, both of which are showing signs of life against easy compares. 


Skechers Plans to Expand into Ireland - Skechers USA Inc. revealed its plans Thursday to launch Skechers-branded retail stores throughout Ireland later this year. Under a licensing deal with footwear retailer Shuz 4 U Ltd., SKX will open the first two shops (for men, women and kids) in Dublin and Cork by the end of 2010. Additional stores are planned over the next five years. “Our 10 branded Skechers stores in the United Kingdom give us a highly effective means to reach consumers," said Michael Greenberg, president of Skechers, in a written statement. “This licensing partnership with Shuz 4 U allows us to leverage strong European Skechers brand recognition into an expansion of our retail foothold and build on the strong wholesale business we currently have in Ireland and the U.K." <>

Hedgeye Retail’s Take: By going the partnership route, this makes the move into Ireland less risky but also less rewardy.  Nonetheless, it’s finally time for the Irish to don their EasyTones on the way to the pub.  Something tells us Ireland is not where the real opportunity lies in Europe.


GSI Maintains E-Commerce Agreement with Radio Shack - GSI Commerce Inc. announced a new multiyear extension of its e-commerce agreement with RadioShack Corporation. Under the new agreement, GSI will continue to provide RadioShack® with e-commerce technology, order management, customer care and interactive marketing services. RadioShack has been a GSI partner since 2005. <>

Hedgeye Retail’s Take:   GSI continues to hold its own with those retailers who are behind the curve on building out their own e-commerce infrastructure.  Given the consumer’s high propensity to buy consumer electronics online, it’s interesting to see RSH choosing to use its cash flow for other things rather than finally invest in what may be the only growth vehicle left for the retailer.  Looks they bought themselves some time on this initiative at the very least.


Brands Need to Capture Teen Influencers - Not all are created equal in the eyes of social media advertising.  Investing in ways to capture the attention of the most active and engaged social media teens may have a higher ROI than reaching the masses.  According to a study, the top 15% most active and engaged members of Facebook and myYearbook are more likely than other teens to recommend a variety of products to their friends. Reaching teen influencers will mean taking advantage of earned-media opportunities and word-of-mouth that comes from highly trusted friends.  <>

Hedgeye Retail’s Take:  Put aside the focus on “influencers” and it seems to us that social media, which facilitates real-time, honest feedback on products and brands actually means companies need to produce good product not just good marketing.  The feedback loop is only getting faster and more accurate.

R3: Blackhawks Exposure Revealed - 2


Footwear: What's Selling - WWD asked a few independent footwear retailers what product was selling and what's on sale.  Here are the answers:

Pegasus Shoes, Woodstock, N.Y. 1. Vibram FiveFingers, 2. Jambu Planet and Papaya, 3. Dansko Serena, On sale: “Things are always on sale,” said owner Len Sapiro. “For promotions, right now, we’re giving away a free pair of organic cotton socks with any online order, plus a $3 discount.”

When The Shoe Fits, Vancouver, Wash. 1. Brooks Adrenaline GTS 10, 2. Keen Presidio, 3. Aravon Maya, On sale: “Not a lot right now,” said owner Alan O’Hara. “The semi-annual sale will break on July 9, so right now I just have some discontinued stuff from last year, like old sandals.”

Comfort Shoe Gallery, Gig Harbor, Wash. 1. Taos Treasure, 2. Naot Believe, 3. Chaco Hipthong, On sale: “I have a sale rack of discontinued items, but as far as new products, nothing really,” said owner Lori Cain. “The sale rack is just shoes and boots left over from last winter, so it has some discontinued styles and colors. Some brands, like Dansko, never make it over there.”

Heart & Sole, O’Fallon, Mo. 1.Taos Prize, 2. Romika Maui 01, 3. Birkenstock Mayari, On sale: “Right now sandals are $10 off,” said owner Jerry Herndon. “No specific brand, just all sandals.”

Sole Food, Seattle, Wash. 1. Keen Newport, 2. Creative Recreation Cesario Lo, 3. Camper Laura, On sale: “There’s Keen, Indigo, Frye boots, a lot of sandals and closed-toe ballets,” said store manager and buyer Annie Kritsonis. “I usually put things on sale that I only have in one or two sizes left, so right now it’s a mixture of flats, sandals and pumps.”

All About Feet, Houston, Texas 1. Finn Comfort Phuket, 2. MBT Sport 2, 2. Dansko Serena, On sale: “A little bit of everything,” said associate Jackie Sabbe. “We put all the brands on sale at one point, but the big sales are at season ends. There will be a sale at the end of August and another one in January.” <>

Hedgeye Retail’s Take:  Ask a shoe store what they’re selling in June and what you get? Sandals, sandals, and more sandals.  Add in a little performance running and these comments coincide with anecdotes with the larger chains.  Strong sales of sandals of course are good for margins and limited seasonal markdown risk.

Brazil . . . Winning the World Cup of Interest Rates

Conclusion: Brazil increases interest rates to 10.25%, which leads the G20. Investors applaud, the masses are less pleased.

From Brazil, we're seeing more proactive risk management from a central bank president not named Glenn Stevens. As widely anticipated, the central bank’s monetary policy committee voted unanimously to raise Brazil’s primary interest rate, the SELIC, by 0.75%, to 10.25%.  The previous rate hike – also 0.75%, from 8.75% to 9.5% - was put through in April.  The rate increase was in line with market expectations in the central bank’s efforts to combat inflation.  The monetary policy committee meets again on 20 July.


Labor unions and business owners have expressed displeasure, saying the bank has thrown a bucket of cold water on the economy at what should have been an auspicious moment.  Sao Paulo’s business federation (Fecomerico) said the rate hike is the bank’s way of compensating for the state’s inefficiency.  They said the country should get public spending under control and make investments that will provide productive stimulus, rather than seek to control demand through higher interest rates. Consumers are echoing the more of the same with their wallets. Consumer credit delinquencies rose 1.9% in May Y/Y and 4.3% M/M (the first increase since Oct. 2009). Burgeoning credit card debt, consumer financing and bank loans were seen as the principle cause of the rise in the indicator, as consumer indebtedness grew at an accelerated rate during the last three quarters.  Rising interest rates were also seen as a contributing factor.


While we’d prefer not to take sides here, we do have a soft spot in our hearts for countries that respect the cost of capital – particularly in the face of white-hot growth and above-target inflation. To recap, Brazil posted a China-esque +9% Y/Y 1Q10 GDP release on Tuesday and May inflation (CPI) came in up 5.22%, though down sequentially from 5.26% in April, which is above the target rate of 4.5%.


In short, this seems like a classic case of short-term pain for long term economic gain. While Brazil does indeed have its problems (crime, government wastefulness, dried up capital markets), it certainly deserves a pat on the back for this latest bout of risk management. With the Bovespa rallying 2.6% yesterday, it looks as if it is getting just that.


 Brazil . . . Winning the World Cup of Interest Rates - Bovespa


Moshe Silver

Chief Compliance Officer and Managing Director


Darius Dale



The Macau Metro Monitor, June 11th, 2010



According to DB analyst, Karen Tang, casino gambling revenue in Macau soared 70% in the first week of June. Seeing no sign of a slowdown she raised her forecast of 50% growth in 2010. 



Susan Macke, IGT's chief marketing officer,  believes the growth in slot machine uptake will be similar to that of Las Vegas.  Macke said only 1/2 of the 2,500 slot machines allowed for each casino in Singapore have been installed.  Macke is also bullish on South Korea and the Philippines.  For the US market, Macke does not see replacement rate for slot machines rising to the 10% level any time soon as cautious consumer spending will crimp operators' spending on slot capex; however, Macke does see an uptick in sales before the end of the year.


IM still believes the MOP 20 billion-a-month mark will be broken by October unless Beijing sends a strong signal that mainland asset prices must come down and strong capital flow into Macau is cut off.  Until that happens, junkets will continue to have plentiful working capital and credit to extend to keep the party going.

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