US Growth: Taking Off the Training Wheels?

“God help us if earnings [in the U.S.] are anything short of fantastic.”

-Keith McCullough, June 17, 2010


Conclusion: Despite the remaining bullish sentiment, China still matters to the U.S. growth story. Moreover, signals from China and Dr. Copper are telling us that U.S. 2H10 growth will more than likely surprise bulls to the downside.


With the Shanghai Composite down 22% YTD, Chinese loan demand and loan growth slowing sequentially in 1H10, and Chinese property prices starting to show signs of deflating, it’s been clear for quite some time that the Chinese Ox is still boxed in.  Furthermore, Dr. Copper – a leading indicator for global growth – is in a bearish formation and continues to break down quantitatively.


What does this all suggest? Simply put, growth internationally is setting up to slow and the most leading of all indicators (marked-to-market prices) are telling us just that. U.S. bond yields have been creeping down, which has historically been a leading indicator for slowing growth. The yield on the 10Y Treasury is now at 3.22% - down 79bps from the YTD high on April 5. Factor in a slowdown from the European demand side of the equation as a result of austerity measures and rising illiquidity, and it’s not hard to see why we think growth will slow both globally and domestically in 2H10.


Bullish sentiment in the U.S. has hinged largely on a hopeful domestic growth outlook in 2H10, which is a large divergence from the Chinese growth story that pulled up equity markets globally since the March 2009 bottom in the S&P 500. Again, using market prices a leading indicator for growth, the S&P sectors most levered to the U.S. growth story (Industrials - XLI, Energy - XLE, and Basic Materials – XLB; each broken from an intermediate-term TREND perspective) are telling us that the U.S. is not yet ready to take off the training wheels. In fact, a very high positive correlation still exists between each of those sectors and Chinese equities and copper (see charts below). As noted before, both China and Dr. Copper are still in very bearish setups from a quantitative perspective and weakening international and Chinese fundamentals strongly support that. Despite that, a divergence has emerged between bullish domestic sentiment and marked-to-market leading indicators globally.


When it’s all said and done, we expect this bifurcation to create more downside risk in the U.S. equity market. As Shakespeare once penned, all crashes occur against expectations; and expectations domestically are still far too high in our option. Bulls are too bullish. Bears aren’t bearish enough. With U.S. sovereign debt and deficit issues approaching the limelight, a disastrous setup for housing domestically, and rising joblessness each not fully on everyone’s radar, U.S. growth is likely to crash against current expectations.


Darius Dale



US Growth: Taking Off the Training Wheels? - 1


US Growth: Taking Off the Training Wheels? - 2

The Week Ahead

The Economic Data calendar for the week of the 21st of June through the 25th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - c1

The Week Ahead - c222


Conclusion: Recent policy developments out of Brazil are bullish for interest rates and the real. 


We’ve noted recently that the Brazilian Central Bank’s hike in the Selic rate to 10.25% last week showed a much needed bout of sobriety in monetary policy amid white-hot GDP growth (9% Y/Y in Q1) and 5.22% Y/Y inflation. As is the case with most emerging market economies, one step forward is followed by two steps back.


The latest developments out of Brazil show that the government is still not yet ready to leave the party. This week, Brazilian President Lula approved an increase of 7.72% in pension rates – even more than the 6.14% originally proposed. He defended his decision in the media by saying that his economic team “guaranteed” him that they could find budget cuts sufficient to offset the increase, and also that added consumption from the pension increases would mean increased tax revenues. Shortly after he approved a hike in pension fund rates, President Lula approved pay rises of between 15% - 38% for members of the Chamber of Deputies. On a side note, in the wake of Lula’s approval of legislative pay raises, the Chamber of Deputies approved new proposals – including social security and pension reforms – which, if confirmed by the Senate and signed into law, would cost R$90 billion to implement – the equivalent of eight years’ worth of the entire Bolsa Familia program’s budget. Lastly, Brazil’s Senate approved an 18% pay increase for over 32 million government employees whose representatives have lobbied the government hard during the past several months, including Agriculture Ministry workers, federal prison worker, armed forces medical personnel and intelligence agency employees. 


Conclusion: if you want to get paid, move to Brazil.


All joking aside, the latest wage increases will be positive for domestic consumption. Furthermore, a recently announced export subsidy for exporters who derive at least 30% of their revenue from exports, and who are current with their tax payments will help offset any potential revenue lost from slowing growth internationally.  The measure went into effect in April and is expected to cost R$ 1 billion this year.


All told, the recent policy developments out of Brazil are bullish on the margin for Brazilian growth and inflation – which will put additional pressure on the Central Bank to raise rates again. Speaking of inflation, The general market price index increased 1.06% in the second June sampling.  This was more than the 0.95% increase in the comparable period for May, but less than the 1.55% average projection of economists surveyed.  Producer prices for the second June reading grew 1.37%, versus 1.19% in May.  Agricultural prices were down (0.24% increase, versus 0.80% in May) while industrial prices grew 1.88%, greater than May’s 1.32%. 


In a June 8-9 meeting, policy makers forecast that 2010 inflation will remain “markedly” above their 4.5% target. The minutes of that meeting, published today on the central bank’s website, spurred Brazilian interest rate futures to jump to the highest level since February 2009 (up 6bps to 11.26% as of 9:30am EST). Economists are forecasting that Brazilian policy makers will raise the Selic rate by an additional 75bps in July. The Brazilian real gained 3.4% vs. the U.S. dollar last week, which coincided with a 75bps hike in the Selic rate.


While the Bovespa continues to be broken from an intermediate-term trend perspective, we are starting to warm to the real on the long side as a currency play as a result of the aforementioned hawkish setup and our bearish view on the dollar. Stay tuned.


Moshe Siver

Chief Compliance Officer and Managing Director


Darius Dale






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The Macau Metro Monitor, June 18th, 2010



According to three gaming sources, Macau junket representatives are getting around Singapore's tough rules by checking in as individual VIPs and then giving their chips to 'friends'.  The allegation is that these 'friends' also happen to be customers of Macau junkets.


"What it means in practice is that junkets are operating in Singapore, whatever the regulations say about background checks. It's a grey area as there is nothing in the CRA regulations to say a customer cannot pass chips to his friends," says one source. 


Potential tax avoidance could also be in play as these 'friends' would still be classified as premium players (5% of gross + 7% GST) rather than mass market players (15% of gross +7% GST) even though they are playing with chips valued below the minimum VIP level of SD 100,000.



MGM Grand's new loan facility, expected to comprise a term loan and a revolving credit with an average life of around four years, could be upsized to as much as $950 million depending on banks' commitments.  Pricing is in line with the deals for Venetian Macau and Galaxy in the high 400s, banking sources suggested.



The total number of tourist arrivals over the Dragon Boat Festival holidays (June 14-16, 2010) stood at 257,374, (25.45% YoY growth), according to official data.


Total deposits with the banking sector rose 0.3% MoM in April to MOP300.8 billion.  Domestic loans to the private sector expanded 1.1% MoM in April to MOP106.2 billion.  The loan-to-deposit ratio at end-April 2010 rose 0.7 points MoM to 71.2%.



According to the Security Forces Coordination Office, citizens from Bangladesh, Nepal, Nigeria, Pakistan, Sri Lanka and Vietnam have to pay at least USD 30 for an entry permit to Macau, starting from July 1.  In 1Q 2010, only 46,187 people visited Macau from these six countries, less than 1% of total Macau visitors.

World Cup Chart Of The Day: U.S.A.

The S&P 500 remains broken from an intermediate term trend perspective.


World Cup Chart Of The Day: U.S.A. - World Cup Chart of the Day

R3: Putting Toning Aside


June 18, 2010


While most believe toning has been carrying all the weight for the industry, it appears that the core athletic footwear space is holding its own.





It’s no secret that toning has had a meaningful contribution to the Athletic Specialty channel, with particular strength in May.  However, in recent weeks toning’s contribution to the overall athletic space (as shown below) has sequentially decelerated, but at a greater rate than non-toning product.  As such, if we exclude toning from the equation we see that the overall athletic industry remains in positive territory, with a far less contribution from toning. 


More specifically, it’s worth noting that Skechers and Reebok are showing a meaningful sequential increase in sales when we exclude toning from the data set.   Clearly each brand is benefitting from substantial increases in brand awareness, driven of course by toning.  More interesting will be Reebok’s efforts in the Fall, when we expect to see further line extensions and enhanced merchandising efforts aimed at capitalizing on the brand’s new life.  It’s still early to have complete confidence in the brand’s full resurgence, but this may be the best opportunity for Adi to reinvigorate Reebok since aerobics burst onto the scene.


R3: Putting Toning Aside - Toning 1


R3: Putting Toning Aside - Toning 2 





- Kroger observed that the promotional activity out of Wal-Mart lately is not terribly different than it has been, despite additional media attention focused on increased rollback activity. In fact, Kroger believes that Wal-Mart is acting more like the traditional grocers than they ever have, with a larger focus on key item promotions. Recall that as an EDLP retailer, key items have not been a big a part of Wal-Mart’s pricing strategy.


- PVH management noted that the company’s retail same store sales continue to trend in the 11-12% positive range quarter to date. This is inline with prior quarter results. When questioned about the situation in Europe, PVH’s CEO responded with “We are seeing, if anything, we are seeing the business strengthen over the last six weeks, not weaken. Our comps have improved as we have come up against what I would consider easier comparisons as the year has gone on.”


- PIR one pointed out that it has seen no deceleration in sales halfway through the company’s current quarter. In fact, June month-to-date same store sales are tracking ahead of the company’s reported 14.3% first quarter increase.





Footwear and Apparel CPI Declines While Total CPI Growth Slows- Retail apparel prices fell 0.6% compared with a year earlier while Footwear prices increased 1%. Women’s apparel prices declined 0.1% while men's dropped 2.1%. The overall CPI increased 2% while core CPI increased 0.9%. On the margin, apparel prices sequentially improved while footwear continued to erode albeit at a slower rate. Compared to the Core CPI growth, footwear had been rebounding since July 2007, but has recently slowed and fallen in line while apparel notoriously struggles below the core rate. <>

Hedgeye Retail’s Take:  In contrast to the government data, ASP’s on footwear continue to increase year over year.   After the latest round of earnings reports, most footwear companies suggest that ASP’s are up low to mid single digits.  On the athletic side, innovation has been key to the retailers ability to sell higher price points. 


R3: Putting Toning Aside - CPI 1


R3: Putting Toning Aside - CPI 2 


U.S. Soccer Sues Sports Authority Over World Cup Ads - The U.S. Soccer Federation sued Sports Authority Inc. over its advertisements linked to the World Cup, contending Dick's Sporting Goods is the national team's only licensed retailer. <>

Hedgeye Retail’s Take:  Maybe Dick’s should challenge TSA to a friendly to settle the dispute? 


Liz Claiborne Scores Canadian Licensing Agreement - The firm’s namesake brand, which J.C. Penney Co. Inc. will begin carrying exclusively in the U.S. in August, will be sold north of the border under a licensing agreement with Trimera Group’s Future Fashions division. The brand is currently sold in Sears Canada, but is not produced under license. The agreement, which covers apparel, handbags and accessories for the Liz Claiborne brand, also includes men’s and women’s apparel under Claiborne’s Axcess label, which is sold at Kohl’s in the U.S. Liz Claiborne will provide “select design services” for both brands, while Trimera will work on design, as well as production, distribution, marketing and merchandising. Trimera produces and markets a range of apparel goods worldwide, working with brands as diverse as Disney and Nickelodeon to Sean John and Nike. <>

Hedgeye Retail’s Take:  While Canada isn’t going to move the needle, this is a good move to leverage the now-licensed Liz brand.  Unfortunately, Canada is probably one of the few markets left for which the namesake brand has brand recognition.   


Zumiez to Expand into Canada - Canadian retail real estate consulting firm Northwest Atlantic announced that Zumiez will open a store in the greater Vancouver area. <>

Hedgeye Retail’s Take:  Following in the footsteps of other retailers including KSS and TGT, the push north continues.  The action sports market is alive and well in Canada and this makes perfect sense. 


Google Releases Commerce Search 2.0 - Google on Thursday released Version 2.0 of a service that it hopes the nation’s top 1,000 retailers will use to power the searches on their e-commerce sites. Unlike most competing search products, Google Commerce Search is a cloud service, so it can be set up and customized relatively quickly, and performance will not vary even during unusually busy times such as holidays and sales, according to the company. The faster, better customizable platform claims it will improve conversion rates. Merchants can set up menus with categories of their choice, such as denim, tops, brands, dresses under $99 or pencil skirts. If retailers want to promote certain types of items — latest arrivals, sale or private label, for example — they can arrange to have those show up first on search results. <>

Hedgeye Retail’s Take:  We’re all for making the online shopping experience easier and more efficient and this all seems to make intuitive sense.   


Sun Capital Partners Buys Remaining Limited Stake - Limited Brands Inc. said on Wednesday it has sold its remaining 25% stake in Limited Stores LLC to Sun Capital Partners Inc. for $32mm. Sun Capital now fully owns the brand, having bought a 75% stake in 2007 from Limited Brands, whose chief executive officer, Leslie Wexner, decided to shed the underperforming apparel businesses he founded in the Sixties. In addition to Limited Stores, Wexner sold a 75% stake in  Express to Golden Gate Capital. <>

Hedgeye Retail’s Take:  Is a name change finally on the way for Limited Brands now that the flagship brand has finally been sold?   


Price Wars in the UK - Premium independents have been forced to fire the starting gun on their summer Sales up to four weeks early to compete with high-end department stores. <

Hedgeye Retail’s Take:  With the UK retail marketplace historically promotional at only certain times of the year, this is an interesting development.   


Reebok Cleans Up It's E-Commerce - Reebok had a problem with the way it managed content on its e-commerce site. Adding any new marketing messages or merchandise took too long and required special training with the company’s third-party content management system. After switching to Allurent Inc.’s on-demand Visual Merchandiser tool, Reebok was able to more quickly make changes to its site, reducing the time spent managing web content by 50%. <>

Hedgeye Retail’s Take:  Probably a good time to upgrade the site that has gotten deluged with visitors since EasyTones hit the market.  In fact, the site is almost entirely devoted to the toning product- as it should.


International Brands Dominate Facebook Fan Index - Although American brands hold the #1 spots across fashion, footwear, and retail, international brands hold top spots.  Adidas, Puma, Lacoste, and Burberry rank 2-5 in fashion. Adidas and Puma take 2 and 3 in footwear. Zara and H&M take 2 and 3 in retail. 

Hedgeye Retail’s Take:  Many interesting conclusions to gather from the table below.  Mainly, those brands with the biggest budgets and reach by traditional measures are not necessarily the most popular Facebook brands.  Also, luxury brands seem to have a great following despite the likeliness of having an older, less tech savvy customer demographic.   


R3: Putting Toning Aside - Facebook Fan Index



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