Guarding The Guards

“Who will guard the guards themselves?”



In recent writings, I’ve been focusing on the events that led to the fall of the Roman Empire. I’ve been trying to wrap my head around the dynamics of politics and power in societies that are dominated by professional politicians as they finally hit their tipping point.


I have a profound respect for economic and political history, not because it’s ever the same, but because the patterns of human behavior often rhyme. I’m certainly not an expert on Rome pre 49BC when Julius Ceasar crossed the Rubicon, but in hindsight I can see as well as you can. The outputs of certain abuses of power become crystal clear.


One of the best parts about my job has turned out to be putting myself at the very heart of an exclusive network of thought leaders. Every morning I basically have an opportunity to inspire a debate. The more outside of consensus I get, the louder the feedback mechanism of the Hedgeye network becomes.


The aforementioned quote came from one of our many thoughtful subscribers. He’s studied the aftermath of what I have been writing about as of late. Juvenal was a Roman poet from the 1st century AD.  I consider myself very fortunate to be privy to thoughts like these – it’s always important to consider what winners in this business are thinking. Collaborative thought is a critical driver of risk management.


Our subscriber wrote:


 “Through his Satires of Juvenal, who once asked, “Quis custodiet ipsos custodes?” Effectively meaning, “Who will guard the guards themselves?” (along with other similar, idiomatic translations) the question posed by Plato and put to Socrates as the main character in The Republic, is as proper now as it was more than 2,000 years ago. With Fiat Fools and global government incompetence accelerating the journey down the Road to Perdition, every free market thinker should ask, and then answer for himself, this question.”


Sometimes it’s that simple – risk management, that is. Sometimes the best absolute performance is assigned to whomever is able to contextualize all that’s going on in this interconnected world and ask themselves the right question first.


Answering the question of “who will guard the guards” of the Fiat Fools becomes less and less clear by the day. Whether it’s Jean-Claude Trichet talking circles around the ECB’s bailout program this morning or Alan Greenspan doing his best to attempt to dislodge himself from the problems he perpetuated, this all seems to be heading the same way. The guardians of debt financed deficit spending are expediting their own demise.


This morning, Greenspan is making headlines by finally admitting that the US cannot Pile Debt Upon Debt Upon Debt in perpetuity. In a WSJ Op-Ed, he wrote: “Perceptions of a large U.S. borrowing capacity are misleading… Long-term rate increases can emerge with unexpected suddenness” and that the Big Government Keynesians of the world need a “tectonic shift” in the way that they have been purporting to guard their respective citizenries.


It’s US Open time, and even I will give Mr. Greenspan a golf clap for that. Well done. Listening to the facts and evolving the thought process is always a critical part of any risk manager’s evolution.


But will the guards who have been guarding Ben Bernanke and his Japanese style monetary policy hold the line? Do the guards of Washington’s Economic Officialdom care what the 84-year-old man of the money printing presses is saying this morning?


My risk management style isn’t to ask an academic like Larry Summers or Christina Romer in Washington for a leading indicator that might start answering these questions. I ask Mr. Macro Market. What we have seen in the last 3 weeks may not be a “tectonic shift” in the market, but it’s certainly a change on the margin. As Ben Bernanke and Tim Geithner refuse to address the debt and deficit problems in this country, the US Dollar has started to fall.


Since its highs in early June where we shorted it, the US Dollar has all of a sudden lost over -3% of its value. Now any currency trader (which John Maynard Keynes was himself) will quickly remind you that this is partly because the Euro has stopped going down. And I will, in turn, quickly agree – after all, market prices don’t lie; politicians do. All currency moves should be considered relative to each other.


This, importantly, only amplifies my point. As Europe admits that it has a deficit problem, implements austerity measures and, at the same time, the US Administration continues to maintain this ridiculous stance that America’s spending and debt problems are “different”, the Euro actually becomes relatively more credible than the US Dollar. Again, everything is relative between two fiat currencies that are manipulated by Fiat Fools.


Now I am certain that I will get a lot of emails on that statement, because it’s not patriotic to say the Euro is anything but a dog with fleas, but managing risk with your patriotism or politics only gets you in trouble so let’s take a step back and respect that in the last decade the Fiat Fools of US monetary policy have done nothing but debauch the value of the US Dollar. Pull up a 30 year chart of the US Dollar and the story is the same – a long term series of lower-highs and lower-lows.


Why is that? Where have the guards of fiscal conservatism gone? Who will guard the guards of the US currency debasement experiment from here?


Sadly, after seeing Ben Bernanke’s Fed add another $14 BILLION of mortgage backed security toxic waste to America’s liabilities this past week (taking the Fed’s balance sheet up to its highs of $2.35 TRILLION dollars!), there are fewer and fewer guards with credibility left.


My immediate term support and resistance lines for the SP500 are now 1099 and 1135, respectively. We remain short the US Dollar via the UUP.


Best of luck out there today and enjoy your weekend,



Keith R. McCullough
Chief Executive Officer


Guarding The Guards - Chart des tages


The CAC40 intermediate term TREND line is broken at 3,799.


Coming out of the Hedgeye MACRO morning meeting, France (EWQ) is our top SHORT idea.  France is taking on Mexico today.  While France is the higher ranked team by FIFA at #9 (Mexico is #17) les bleus have been somewhat out of sorts lately.  Coach Domenech’s approval rating is at a similar level to that of Nicholas Sarkozy. 


While the referees will be watching closely for any French handballs, we will continue to hold the French accountable for their piling debt upon debt upon debt.



VXX Levels

In today’s US Strategy note we provided levels for the VIX.  We have been asked by a number of clients to provide our levels on the VXX; we are currently long the VXX in our virtual portfolio. 


VXX Levels - vxx


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With the pending release of Malcolm Knapp’s May same-store sales and traffic trends, the rumor mill is circulating a -1% same-store sales number.  We obviously have no way to confirm the validity of this -1% number prior to Malcolm’s official release, but we thought it was worth commenting on regardless. 


A -1% same-store sales result would imply flat 2-year average trends on a sequential basis from April.  For reference, same-store sales trends in April decelerated 80 bps on a 2-year average basis from March.  In light of the sequential slowdown in May 2-year average trends reported by a few QSR companies (please refer to yesterday’s post titled “QSR – A LOOK AT CURRENT TRENDS” for more details), I was expecting a further slowdown in May for the casual dining operators so a -1% would be positive relative to my expectations.  It is worth noting, however, that this upside to my estimate would still imply a 50 bp deceleration in 2Q10 quarter-to-date trends from the first quarter on a 2-year average basis.  So, as I have said before, top-line trends will be coming under increased pressure as the industry, on average, begins to lap increasingly more difficult YOY EBIT margin comparisons in 2Q10 and for the balance of the year.


In May, we are lapping the first month in 2009 when reported comparable traffic growth was better than reported same-store sales growth.  This trend, which Malcolm dubbed “a most unusual event”, continued through November 2009 as a result of the significant industry discounting.  As we begin to lap these bigger YOY average check declines, we should begin to see checks stabilize YOY, offset by traffic.  Although significant discounting is not good for average check growth or margins, continued improvements in traffic trends will be the most important indicator of a recovery.  In April, traffic trends on a 2-year average basis slowed 140 bps sequentially from March and 100 bps from the average in 1Q10.


CASUAL DINING – KNAPP RUMOR MILL - Knapp May 2010 estimate


Recent casual dining management comments:


PFCB June 9 presentation:  The company implemented a 1% to 2% price increase at the Bistro in May in an attempt to support average check, which has been a drag on comp growth as traffic has improved.  And, Mr. Vivian stated that comp growth is “getting dangerously close to getting positive.”  Weekday sales growth is improving ahead of weekend growth, which he attributes to stronger business travel spending (accounts for about 30% of Bistro’s tickets).  He also commented that sales and traffic trends at Pei Wei continue to improve in 2Q10. 


Specifically, he said that management continues to believe that the second half of the year will be better than 1H10, and in line with management expectations, they are continuing to see a gradual improvement in trends across the country.  They are seeing signs of life in Arizona and California and although retail activity slowed in May in California, the Bistro continued to show steady progress. 


EAT June 8 presentation:  Relative to average check trends, the company stated, “We’re hopeful that some of the more aggressive discounting that’s been occurring in this space is starting to abate, and you’re starting to see people promoting lower- priced items on their menu than necessarily discounting items, which we hope is a good sign.”


CAKE  June 8 presentation: “Without specifically commenting on any results that we’ve seen since we made our – gave our guidance in April, I think that the consumer is impacted obviously by a lot of things and the stock market going up and down, the things that are going on overseas.  Things that don’t make you feel better about your wealth don’t help you consume more. So those are things that are potentially worrisome for all consumer product companies. And I would just say that what we’re focused on is controlling the things that we can control.


We can control, when you come into our restaurant, whether we give you a better experience than we gave you the last time we came in, that the food was hot, that it was cooked perfectly and that your wait time was reduced, or at least your quote time was accurate. There is many things that we can control. So we’re working on those types of things, but I think the consumer is resilient. They showed that they returned to the brands that they liked the best first, when they came back. And dining out is one of those things that I think consumers are – they like to take away last and they like to put back first when they feel like they can, from a economic standpoint.


We have – incident rates on desserts are up for us, which is kind of incredible in this environment.  They’re up and consumers are ordering more desserts, less alcoholic beverages, so we’re not driving them to drink, I guess yet. But our incident rates on most of our items are up, other than beverages.”

RUTH June 8 presentation:  They have three buckets of consumers (special occasion, business and affluent, core consumers).  Each bucket makes up about 1/3 of tickets.  Regulars are coming back and they are seeing better special occasion trends.  Weekend business is getting stronger and total revenue is up on certain nights.  They are seeing more energy around the restaurants and bars.


Howard Penney

Managing Director

R3: Insights from Weekly Sales Numbers

The athletic industry is still looking good. Regional performance is shaping up out West. Nike and UnderArmour are looking solid, while Columbia is simply crushing it.




  1. Both footwear and apparel sales maintain a healthy underlying trend.
  2. Apparel is stronger on the margin, as it continues to gain traction week on week. Footwear decelerated last week, but the more-important 3-week trend is still holding.
  3. The week showed a sharp rebound in Pacific, South Central, and Mountain states. Note that some retailers – including Payless – highlighted these regions as a source of comp weakness in the recent quarter.
  4. Reebok footwear continuing to trend +160-170%yy. This is ALL toning. We’ve gotta give credit where it’s due.
  5. Nike and UnderArmour remain strong…Though a clear standout is Columbia Sportswear, which is posting solid numbers across the board in footwear and apparel alike.

R3: Insights from Weekly Sales Numbers - AppFt Trends 6 17 10 1yr


R3: Insights from Weekly Sales Numbers - FW App Industry Data 2yr 6 17 10


R3: Insights from Weekly Sales Numbers - FW App Industry Data Table 6 17 10


R3: Insights from Weekly Sales Numbers - FW App Industry Data Table 2 6 17 10


R3: Insights from Weekly Sales Numbers - FW App Industry Data Table Geo 6 17 10


R3: Insights from Weekly Sales Numbers - FW App Industry Data Channel 6 17 10


R3: Insights from Weekly Sales Numbers - FW App Industry Data Channel 2 yr 6 17 10



  • According to Nielsen, SKU counts in the supermarket channel shrank by 1% in 2009. While this is hardly a noticeable amount to even the trained eye, 60% of retailers indicated that the reductions were driven by the desire to eliminate shopper confusion. Categories that were reduced the most included water, cookies, and shampoo. Shower gel, yogurt, and carbonated soft drinks actually showed SKU count increases.


  • Rumors persist that Kohl’s has been investigating real estate in Canada. While no formal plans have been announced, the move to the north makes sense and is the most “obvious” international expansion opportunity for any domestic retailer. Recall that Target has already announced it will make a move into Canada over the next five years.


  • Converse tops the list of growth in Facebook followers for the month of June. The brand currently has north of 3 million fans, up an impressive 30% since May. Interestingly, the next closet brands in terms of sequential growth were Levi’s and Christian Leboutin, up 10% and 9% respectively.



New York & Co.’s Top Two Design Executives Have Abruptly Quit - Marie Holman-Rao, chief design officer, and Anne-Charlotte Windal, senior vice president and general manager of design, both resigned this week. A search for their successors is expected to begin immediately. In the meantime, Greg Scott, president, will lead the design and visual teams. Windal is expected to stay at N.Y. & Co. for awhile until the company rebuilds the design team. The departures compound the challenges of inventory buildups and some fashion misses that have caused the company to expect Q2 losses. The retailer needs to sharpen its image selling sexy, modern and moderate price apparel and accessories targeting women 25 to 45.  <>

Hedgeye Retail’s Take: This won't be the straw that breaks the camel’s back, but when you're one of the only retailers discounting on top of discounts last year due to fashion misses you've gotta be worried...


Adidas Again Defends Soccer Ball - Adidas again defended itself against complaints against its new Jabulani soccer ball and its performance at the World Cup. Adidas' Global PR Manager Erik Van Leeuwen noted that FIFA has said that the new ball is tested and proven and there have been no complaints. <>

Hedgeye Retail’s Take:   Negative PR is still PR.  And, this is probably not going to prevent the local kid from wanting an “official” World Cup ball to kick around at the park.


Hopkins Sporting Goods Buys Stake in Wrestler's World - Iowa-based Hopkins Sporting Goods has acquired a minority stake in Suplay Products, Inc. dba Wrestler's World. Terms were not disclosed. <>

Hedgeye Retail’s Take:  This is the real type of wrestling gear, not the WWE kind.  Aside from the M&A worthiness of this, there are no signs that wrestling has become a growth area for the sporting goods industry.


Early Sales Indicate Father's Days Sales Upside - Early sales indications are decent — if not spectacular — for most retailers, and they’re expecting a surge in the final days before the holiday on Sunday. So far, traditional seasonal items such as T-shirts, shorts and short-sleeve knits have been most popular. Stores have been aggressive in their promotions this year — whether it’s gift-with-purchase coupons, one-day specials or celebrity in-store appearances. With overall business still a little shaky, stores believe they need incentives such as these to drive sales. According to the 2010 Father’s Day Consumer Intentions and Actions Survey, conducted by BIGresearch for the National Retail Federation, consumers will spend an average of $94.32 on Father’s Day gifts this year, up nearly 4%. Total Father’s Day spending is expected to reach $9.8 bn. Special outings, gift certificates and apparel are expected to be the most popular gift choices this year, according to the survey. <>

Hedgeye Retail’s Take:  While this commentary on sales trends  is not terribly different from that which characterized Mother’s Day, the reality is the spend on Mom is 50% higher than it is for Dad.  Either way, this bodes well for June- which was already off to a solid start.


Tiffany Engages in M-Commerce - The jeweler has introduced an iPhone and iPod Touch app that offers a virtual display case of its diamond rings. The app, dubbed the Tiffany & Co. Engagement Ring Finder, was created in response to growing customer desire for mobile and interactive shopping, the merchant says. The app includes Ring Sizer, a tool that lets shoppers determine their size by placing a ring directly on the screen of the mobile device and aligning it with the correct circle in a guide. Shoppers can browse the collection according to shape, setting, metal or design. The rings are shown in actual size. Each style may be viewed with diamonds of six different carat sizes. And shoppers can zoom in on a ring’s details, pair the rings with wedding bands, and save or share their favorites via e-mail, Facebook and Twitter. <>

Hedgeye Retail’s Take:  Clever way to get males excited about one of the biggest purchases in their lives, especially if they’re shopping at Tiffany. Or better yet an even more clever way for someone to drop a hint that they want to get engaged!  Also an interesting juxtaposition between and old-school, heritage brand and forward-thinking technology.  It won’t be long before almost every retailer has some sort of mobile presence.


Men's Wearhouse Looks to E-commerce and M-commerce for Sales Growth - The addition of mobile-phone shopping applications that store customer sizes, preferences and offer a phone answering message from the Men’s Wearhouse founder and chairman is part of a plan to increase the e-commerce business. Currently, e-commerce accounts for less than 5% of the company’s $1.9 billion in annual sales. “That’s our main focus now in all our divisions — to make e-commerce an integral part of our business,” Zimmer said at the annual shareholder meeting, describing a strategy in which Internet and sales among the company’s 1,142 U.S. and 117 Canadian stores work in tandem to bolster business. <>

Hedgeye Retail’s Take:  With fit and alterations being such an important aspect of a suit purchase, this is one business that may hit some limit on how far it’s direct business can go.  However, once fit is established (provided the waistline stays put), we can see some interesting replenishment opportunities via e-com and m-com.


Macy's Private Label I.N.C. to Sell Men's Footwear - Macy’s private-label collection I.N.C. International Concepts, a line of moderately priced apparel and outerwear for men and women, is adding men’s footwear to the offering for fall. A women’s collection is already at retail. The collection will include a wardrobe of looks, from motorcycle boots to high-top sneakers. Set to retail for $60 for sneakers to $100 for boots, the line will hit 150 Macy’s doors in July. <>

Hedgeye Retail’s Take:  Seems like a natural extension for Macy’s powerhouse private brand, but not one that is likely to move the needle. 


Kohl's Inks Deal with Aldo Shoes - Kohl’s is looking to take its burgeoning footwear business to the next level. The department store chain said Wednesday it has inked a deal with Aldo International to produce private-label offerings for the chain. Aldo will design a range of products for women and men, and the styles will be available at Kohl’s stores and on Kohl’ beginning next spring. The move, Kohl’s said, will bolster its private-label and exclusive brand segment, which accounted for 47% of sales in the first quarter. <>

Hedgeye Retail’s Take:  Good move here by KSS to boost its fashion footwear offering while maintaining differentiation from JCP and others.  Also, an interesting opportunity to take Aldo distribution out of the mall to new distribution points. 


Seven For All Mankind Return to Print Advertising - 7 is aiming to spur growth with an ambitious, multimillion-dollar advertising campaign for fall that will be its first print campaign for the VF Corp.-owned premium denim brand since fall 2008. The campaign, which was shot by Mert Alas and Marcus Piggott and features models Masha and Julian Schratter, will break in September books, in addition to an outdoor and online component. The media buy comprises 15 titles, including Vogue, W, Vanity Fair, InStyle, Elle, GQ, Details, V and Nylon. The ads also will run in Europe and Asia. The brand is celebrating its 10th anniversary this fall and the company hopes the campaign will help drive traffic to stores. For the first time, the brand tapped an outside agency to create the ads, New York-based Chandelier Creative.  <>

Hedgeye Retail’s Take: We're finally seeing VFC put its money where its mouth is.  VFC claimed over the last 2 quarterly calls that they would increase spending primarily on Vans and TNF.   Now it looks like Seven is getting some marketing dollars as they look to revitalize the once-hyped denim brand.   Next up, accelerating store growth? Most Consistent Online Retail Site in May - had the best consistency rating among large retailers for May, says Gomez, the web performance division of Compuware Corp. Last month the mass merchant had the best aggregate site loading time at 17.60 seconds. Rounding out the top five retailers after, Gomez listed (17.85 seconds), (18.75), (18.93), and (18.99).  <>

Hedgeye Retail’s Take:  Clearly the benefit of operating in an online world, companies can measure with complete accuracy how fast it takes to load their sites.  We just wonder if the consumer really notices a 1-2 second difference in load time across different brands.  No matter how long it takes, waiting even a minute is sure faster than getting into the car and heading to the local strip-mall.  Clearly there’s a double standard here in terms of expectations in an online vs. offline retail experience.


China's Quanzhou City Produces 20% of World's Sport Shoes - Sports shoes manufactured in China's Quanzhou city currently accounts for 40% of national production in 2010, and 20% of the world's total output, according to China Leather Industry Association. The city has 925 shoe businesses with production capacity of RMB100 million and achieved total output value of RMB208.315 billion in the first five months, up 29.4% from early year. <>

Hedgeye Retail’s Take: Its not like Quanzhou was off the radar, but add the city name to your google global alerts… we will.


Following the 3 day holiday and through the 16th, June revenues now look on track for north of HK$14 billion. 



Macau table gaming revenues through June 16 came in at HK$7.5 billion.  Projecting the current run rate over the remaining 14 days of the month, and adding estimated slot revenues, yields a full month projection of HK$14.8 billion.  However, business is likely to taper off following the recent 3 day Chinese holiday so our best estimate is for June revenues of HK$14.0-14.5 billion.  While it's not May's 95% growth, 74-80% growth is still very impressive.


In terms of table market share, LVS lost a lot of share over the holiday, down to 19.2% but similar to May's low of 19.4%.  Wynn held steady, just below 18% but way up from May's 15.7%.  MPEL seemed to do quite well over the holiday, raising its table share from 12.0% to 12.8%, but still below May's table share of 14%.



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