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New Home Sales Collapse - Not Surprising


We've been a broken record for a while on the coming collapse of housing activity following the April 30 expiration of the government's tax credit-induced false reality. This morning, new home sales data finally reflects what purchase applications have been telling us for the last seven weeks. New home sales came in at 300k, down 40% month over month from last month's 504k seasonally adjusted annualized rate. April (the prior month) was actually downwardly revised to 446k from 504k, so pegging this month's number of the revised number looks a tad better - down 33%. Inventory was basically flat at 213k vs 211k last month (though last month was revised up to 214k, suggesting a nominal inventory decline.


This was the lowest sales level since 1963, the year record-keeping began. Not a positive sign for the housing market.










Purchase Applications Suggest More Pain to Come


MBA mortgage purchase applications dropped another 1.2% this week sequentially. This brings the tally to six of the last seven weeks that purchase applications have fallen sequentially. For reference, to put things in context, purchase applications are down 70% from the highs in 2005/2006 and are levels not seen since 1. Taking the YTD 2010 applications, which includes the tax credit stimulus, applications are at levels not seen since 1 (including the stimulus!).




The stage is now set for a much weaker-than-usual summer housing environment. Housing-sensitive stocks could be at risk heading into the 2H10 and 2011 time frame.


We have an extensive report coming out on this topic on Friday, which Josh Steiner will summarize on a conference call at 11am on Friday for subscribers of his Financials research. Email sales@hedgeye.com if you are interested in learning more about his product and the call.


Joshua Steiner, CFA


Allison Kaptur


Plenty of red on the screen yesterday and today.


CPKI’s slashing of guidance continues to impact the restaurant space.  Accordingly, casual dining declined the most yesterday, with the average decline among casual dining stocks that I follow being 3.3%. 


Here are a few notable points that emerged in the past 24 hours:




  • Brinker has entered into a new $400 million senior credit facility consisting of a $200 million revolver and a $200 million term loan.   The liquidity afforded by the unfunded revolver plus $160 million in proceeds from the sale of On the Border amounts to $360 million (or 23% of the market cap), making the company a natural buyer of the stock.  This is consistent with the plan outlined by the company during their analyst day in March.



  • Strong sales for period 5 from Hardee’s.



  • Tim Horton’s is looking to capture more market share in the United States with a revamp of its concept, including a redesigned bakery-café look as well as upscale menu offerings like baked goods and espresso-based drinks



  • Presentation yesterday disclosed that it expects profits in India to hit $100 million by 2015.
  • Taco Bell opening in UK .



  • Reported disappointing numbers after the close on Monday and that was reflected in yesterday's decline.



  • Possibly facing lawsuits over toys, could drag out bad publicity.



  • Introduced new chicken sandwich on premium whole grain bun.
  • “Nutritionally improved”.



  • Arby's has appointed restaurant industry veteran Warren Chang to a new position to improve customer experience



  • Tom Cawley sells 5,698 shares of PEET on 06/22/2010 at an average price of $41.95 a share



  • As of July 1st Starbucks will make Wi-Fi access available for free at more than 6700 Starbucks coffee shops.



  • Standard & Poor's Ratings Services said Tuesday that certain of its ratings on Landry's Restaurants Inc. remain on "CreditWatch" with negative implications after the company's CEO raised his offer to take the company private.



  • The prospect of pronounced seafood cost inflation is part of McCormick & Schmick's issues and the stock underperformed yesterday.  This seafood cost impact is being felt again today by KONA, DRI, RT and MSSR which are all trading down this morning.



TALES OF THE TAPE - stocks 623





Howard Penney

Managing Director

The Real Winners/Losers of World Cup

Let’s face it. Western Europe hasn’t exactly shown up thus far for World Cup. There are 6 negative standouts. 4 of 6 are Adidas teams. One is Umbro (NKE) and one is Puma. Of the 6 winners, they are evenly split between Nike and Puma.



We’ve seen our fair share of upsets thus far in the initial round of World Cup play. The biggest is probably the stone cold reality that Western Europe has – thus far – failed to show up for the event. Specifically, England, France, Germany, Italy, Spain (and of course…poor ‘ol Greece) need to overcome insurmountable odds in order to make a push into the next round.


Slovenia, Serbia, Portugal, Holland, Switzerland and Denmark are surprising on the upside.


Of those surprising on the downside, 4 of the 6 are Adidas teams. One is Umbro (Nike), one is Puma.

Of the 6 surprising on the upside in Europe, 3 are Puma and 3 are Nike. Sorry HErbert (Hainer -- Adidas CEO).


Ironically, the big winner in all of this is Brooks, which endorses only one team – Chile – which has performed far beyond expectations.


I bring this up not out of human interest, but because the magnitude of this event on a world stage can, and will, have regional economic consequences. The poorly managed brands will let the winners of a match dictate their product/brand fate. The well-managed brands will use either victory or loss to establish an emotional connection with a consumer to build the brand (remember what Nike did when Liu Xiang in China when he disappointed at the Beijing Olympics).


The Real Winners/Losers of World Cup - World Cup 2010

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R3: TRU Snowjob Begins


June 23, 2010


Lot’s of stuff in here today folks. A) Toys-R-Us banking on Wall Street not having memory that recognizes how it failed in the 1990s, and how Yuan revaluation will hurt w 90% of toys made in China. B) Bangladesh labor unrest shutting 700 factories. C) WSM, AMZN, SHLD, M, etc…





As part of the pre-IPO process, Toys R Us indicated it is significantly increasing its remodel and side-by-side store relocation efforts. As a result, capex is expected to double this year to $400 million. At the same time inventory is on the rise as the company builds a pipeline for holiday pop-ups as well as takes advantage of excess inventory purchases at favorable prices. Management reiterated that one of the company’s competitive strengths its ability to store inventory rather than cross-dock it.


Ok, so let me get this straight…


Toys-R-Us is asking for capital so we can bet on their ability to invest capital in remodels and inventory? Sound vaguely familiar to 13 years ago?  We’re talking toys, not diamonds! Aside from a Monopoly board and diapers, this stuff depreciates rather quickly.  Oh and by the way, the only category in retail that has greater exposure to China from a sourcing standpoint is Toys (over 90%).  So with an appreciating Yuan v. $, either a) the brand eats the cost increase, or b) the retailer eats it, or c) the consumer pays more. Mark my words, consumers will not pay a penny more for a Barbie. Brands and retailers will start beating each other up again.





- As a reminder that Williams Sonoma is one of the forward thinking retailers when it comes to e-commerce, the company reiterated its commitment to spending 20% of its marketing budget (up from 6%) this year on digital. Additionally, the company noted that the bulk of future capex will be centered on technology and ecommerce infrastructure as the core brands are less likely to see major square footage growth from here.


- Yet another chapter in the American Apparel hiring policy saga is unfolding. This time the company has added disclaimers to new hire packets which are aimed at enforcing a confidentiality agreement. According to the language in the document, employees could be penalized $1 million if they breach the agreement by speaking with unauthorized parties. Again, we reiterate that focusing on same store sales and margins may be the best course of action for the company rather than spending so much time on building a retail police state.






China Returns to the Top of the Global Retail Development Index - China returned to the top spot for the first time in eight years while emerging markets in the Middle East and North Africa dominated consulting firm A.T. Kearney’s ninth annual Global Retail Development Index of markets seen as ripe for retail expansion. China, third in the 2009 study, leapfrogged over India, which fell to third from first, and Russia, down to 10th from second, in this year’s study, while Kuwait, not included in last year’s rankings, moved into the second spot. Following the study’s preparation, the floating of the yuan will mean the purchasing power of the Chinese consumer is really going to increase. If you’re sourcing there, prices are going to go up, but selling to the Chinese is going to become easier. The study measured global expansion opportunities in 30 markets based on 25 different criteria, including retail saturation levels, economic and political risk, retail market attractiveness and the spread between rising gross domestic product and retail growth. <wwd.com/business-news>

Hedgeye Retail’s Take:  Putting the list aside, China is pretty much the only market that domestic retailers are increasingly focused on.  Interestingly, recent discussions surrounding India’s loosening of its Foreign Direct Investment laws may soon boost that country’s attractiveness.  On the luxury side, expect Brazil to draw additional focus as many premium brands are looking to tap into the country’s growing pockets of wealth. 


R3: TRU Snowjob Begins - 1 


Labor Unrest Shuts 700 Apparel Factories in Bangladesh - About 700 garment factories in Bangladesh were shut Tuesday after days of violent protests by tens of thousands of workers demanding better wages. The news is likely to undermine confidence in the country's ability to replace China as a low-cost source for apparel and footwear production. On a separate note, Bangladesh is now targeting $400mm RMG exports to Latin American countries over the next 3 years. <sportsonesource.com>

Hedgeye Retail’s Take:  Believe it or not, Bangladesh is the 4th largest exporter of apparel to the US, with just over 7% of our goods cting from this country.  Despite any disruption to the supply chain that may result from a prolonged protest, it appears that this is yet another case where higher wages are likely to lead to higher prices. 


UK Retail Sales Remain Negative in June - UK retail sales remained in negative territory in June but retailers expected a return to sales growth in July, according to the Confederation of British Industry's May survey. Retailers saw a balance of -5 on the sales volume balance - up from -18 in the May survey and better than the expected balance of -15 seen last month. The expected sales volume of balance for July is +11. If sales growth does turn positive in July this would be the fourth positive outturn in 2010. The CBI results have been volatile recently. The CBI said retailers are more optimistic about prospects for sales in July in part becuase of the impact of the World Cup.  The CBI said High Street sales weakened slightly, particularly in footwear and leather goods, with grocers and durable household goods seeing solid growth. <automatedtrader.net>

Hedgeye Retail’s Take:  Will consumers really return to the stores if their team doesn’t make it into the elimination round? 


Travel and Tourism Spending Rose in Q1, But Still Below Pre-Recession Levels - Real spending on travel and tourism rebounded in the first quarter, but remains far below pre-recession peak at levels last seen in early 2005, the federal government reported. Retail spending by tourists rose 4.1% over the fourth quarter, while spending on recreation and entertainment rose 3.1%, According to the Department of Commerce’s Bureau of Economic Analysis. <sportsonesource.com>

Hedgeye Retail’s Take:  Good news for the retailers with a high concentration in tourist areas.  However, recent currency moves are more than likely to keep the spigot of tourists flowing freely. 


Macy's Reassigned Top Merchant Jeff Kantor as President of Online Merchandising - Macy’s Inc.’s Web sites — macys.com and bloomingdales.com — exceeded $1 billion in sales last year, but the corporation wants much more. Macy’s is developing a strategy to speed growth of its e-commerce businesses with Jeff Kantor to become president of merchandising at macys.com, effective Aug. 1. Mobile marketing is another big opportunity. Macy’s has an iPhone app that drives sales, and the retailer will this fall test ShopKick, a start-up retail mobile program, to reward customers who visit Macy’s stores. <wwd.com/business-news>

Hedgeye Retail’s Take:  With essentially no square footage growth opportunities, it’s not surprising that Macy’s continues to focus on e-commerce as a profitable growth engine.  With that said, the challenge of creating a seamless online/offline brand experience persists as the high level of promotional activity and high SKU count makes a department store site difficult to execute.


Men's Fashion Slowly Improving - In a season of anniversaries, Italian men’s wear designers continued to reference their archives while simultaneously moving fashion forward. “The best shows were the ones where designers started innovating again,” said Richard Johnson, men’s wear buying manager for Harvey Nichols. “Past seasons have focused so much on heritage, but this season, the best shows experimented with color, fabric and form.” Overall, the mood was upbeat. Buyers said they were working with budgets that had increased in the single digits, adding more chic sportswear to their offerings. <wwd.com/retail-news>

Hedgeye Retail’s Take:  Sounds like a bit of risk taking is coming back into men’s fashion.  All in, men are never going to move the fashion needle when it comes to sales but it is refreshing to see experimentation begin to accelerate.  Newness is key…


HOTT Goes International to Canada - California-based mall retailer Hot Topic is readying its first international brick-and-mortar push with two store openings in Toronto this August. The apparel and accessories retailer currently operates 681 stores in the U.S., as well as a website for overseas customers.  <licensemag.com>

Hedgeye Retail’s Take:  Yet another retailer heading to Canada in the past few weeks.  Zumiez, Target, and Kohls all make the list of Canadian bound retailers we’ve pointed out recently.


Amazon Looks for Upscale Fashion Push - Amazon is reportedly hiring new developers and graphic designers with high-end fashion backgrounds as part of a more upscale approach to selling apparel and footwear. <sportsonesource.com/news>

Hedgeye Retail’s Take:  We suspected this was the next logical move for AMZN after its purchase of Zappos.  There is no reason why better merchandising mixed with AMZN’s solid customer service and logistics can’t help boost the company’s sales in higher-margin apparel and footwear.


Borders Joins the E-reader Price War - After yesterday’s opening volleys by Barnes & Noble Inc. and Amazon.com Inc. in an e-reader price war, Borders joined the fray by offering a $20 gift card with its $149 Kobo e-reader. <internetretailer.com>

Hedgeye Retail’s Take:  Borders still struggling to keep up, this time waiting a day to throw a gift card into the mix.  This move is yet another in a long history of being a follower in the bookselling space.  Recall that BGP opened its superstores after BKS invented the concept and it launched e-commerce late relative to AMZN and BKS.


Sears To Offer Video Streaming - Sears.com and Kmart.com are joining the increasingly crowded video streaming space that includes Best Buy Co.. Apple Inc., Wal-Mart Stores Inc., Amazon.com Inc., Netflix Inc. and Blockbuster Inc. <internetretailer.com>

Hedgeye Retail’s Take:  We’re still waiting for the re-launch of Wal-Mart’s Vudu to see how a retailer may embrace a revenue opportunity derived from content streaming.  At least in the case of WMT, they own the technology platform designed to deliver the goods.  History suggests you need to not only deliver the content but develop an easy and elegant platform for which to deliver it.  This is something that retailers a) don’t want to spend the money on to develop, and b) really don’t have the expertise to achieve.


Brooks Sports Appoints Director or Apparel Merchandising - Brooks Sports, Inc. added Kurt Heimbach to its management team as director of apparel merchandising. Prior to joining Brooks, Heimbach served as the global apparel director for men's and women's running, tennis, and basketball at Reebok International Ltd. <sportsonesource.com/news>

Hedgeye Retail’s Take:  We suspect the recent boost in the technical running space is fueling a pick-up in apparel related efforts.  While Brooks is primarily known for its quality running shoes, the company’s apparel program is small relative to the overall business.  With some wind at their back, it’s clearly time to pick up their efforts in this high margin category.




The Macau Metro Monitor, June 23rd, 2010


ADELSON COMMENTS Asia One News, Reuters, Bloomberg, Channel News Asia, SCMP, macaubusiness.com


  • MBS could generate +$1 billion a year in EBITDA.
  • Expects between 125,000 to 150,000 daily visitors to MBS once the casino is fully open by 2011. On average, there are 25,000 MBS visitors daily.
  • MBS will primarily target customers from Singapore, Malaysia and Indonesia, with an eye on other Southeast Asian countries like Thailand and Vietnam.
  • Company officials said MBS received 500,000 visitors this month. (~550,000 people visited MBS in the first 25 days of May).

On Macau:

  • “Macau is serving Hong Kong, Taiwan and southeast China... They are two different markets and they appeal to two different constituencies.”
  • The Venetian Macao gets about 40,000 visitors to its shopping malls during the week and about 65,000 on weekends.

Other comments:

  • Gaming in Las Vegas should return to pre-crisis levels within two years.  "Gaming activity in Las Vegas will return to “+80%” of pre-crisis levels in 2011 and “probably about 100% in 2012.”
  • "I am really keen on setting up an integrated resort experience on the lines of the Las Vegas strip in India, anywhere Mumbai, Chennai, Bangalore or Delhi. But the government is sadly not keen.”
  • Expressed interest in building Las Vegas-style casino strips in Greece, Italy, and Spain.
  • “I believe we can put the equivalent of five plus Las Vegases, with 140,000 hotel rooms each in five different locations in Asia, and it still won’t saturate the demand"--referring to Asians' propensity to gamble.
  • Expects 90% of LVS's revenue to come from Asia by 2020. (Asia accounted for 73% in 2009).


 “Regarding the hotel [Four Seasons], the case will be carried out according to the law and the Government’s policies,” secretary for Transport and Public Works Lau Si Io yesterday told reporters.  Secretary Lau has stressed that the apartment-hotel is not a housing complex and is subject to regulations similar to those of hotels.


 Total visitor arrivals surged by 31.8% YoY to 2,098,267.  Visitors from Mainland China soared by 43.5% YoY to 1,135,430 (54.1% of total visitor arrivals), with 450,037 traveling to Macao under the Individual Visit Scheme (42.4% YoY). Visitors from Hong Kong (589,644); Taiwan, China (103,862) and Japan (36,778) rose by 20.5%, 6.0% and 39.5% respectively; visitors from India (25,631) and the Republic of Korea (25,341) also registered remarkable increases.



Singapore's consumer prices climbed 3.2% on-year to a 14-month high in May.  CPI rose 0.6% MoM.


For the second day in a row the USA was one of the worst performing markets in the world.  The worst performing market was Luxembourg, which was down 2.8%, as compared to the Russell 2000 down 2.1% and the S&P 500 down 1.6%.  Volume on the NYSE was up 5% day-over-day, but remains at very low levels.  All of the major indexes closed around their worst levels for the session, with the S&P 500 back below its 200-day moving average.


All nine S&P 500 sectors declined yesterday and it was a nasty day for the Hedgeye S&P 500 Sector Risk Management model; four sectors broke their intermediate term TREND lines (XLY, XLP, XLI, and XLF) and there are currently no sectors positive on TREND. 


There are some key MACRO data points coming up in the next 10 days.  First, we have today’s FOMC meeting.  The FOMC is widely expected to leave the federal funds rate unchanged at 0-0.25% and reiterate its long-standing compromised policy that rates will remain exceptionally low for an extended period.  The FED’s policy statement will likely point to the recent weakness in inflation and the MACRO headwinds from Europe as the primary reason to keep rates low.  Second, there is a G-20 meeting this weekend and third, next Friday we have the release of June employment data.  Following that we kickoff Q2 earnings season.


In Washington the Obama administration is appearing more dysfunctional by the day and there continues to be lingering uncertainty surrounding some of the more onerous provisions in the financial reform legislation, which remain an overhang on sentiment.  Also hurting the Financials (XLF) and Consumer Discretionary (XLY) are the heightened concerns about a double-dip in housing following another round of weaker-than-expected May data.  Existing home sales fell 2.2% to a 5.66M unit annualized pace in May, well below the 6.2M consensus.


Of the four sectors that are broken on TRADE and TREND, two are consumer related - XLP and XLY.  Over the past week the XLY is down 4.9%, as compared to the S&P 500 down 1.8%.  Yesterday, for the fifth straight day, housing-related stocks finished lower, with the S&P Homebuilders index down 2.9%. In addition to the home builders, companies leverage to housing were notable decliners; USG (6.9%) and AWI (4.5%), LOW (3.3%) and HD (2.6%).  In addition, the S&P Retail Index (2%) finished lower for a fifth straight session, highlighting some concerns about a recent slowdown in discretionary spending.


Restaurant stocks were among the worst performers in the consumer discretionary sector today. Notable decliners included casual diners RT (5.4%), RRGB (5.1%), PFCB (4.4%), BWLD (3.6%) and TXRH (3.2%).  The underperformance was triggered on Monday after CPKI (2.4%), said that May-June comps fell considerable from the trends in Q1.  In the QSR space SONC declined (8.3%) also after posting some disappointing numbers. 


Treasuries rallied today with the weaker-than-expected housing data, an afternoon selloff in stocks and a strong two-year note auction.  The DXY rose by 0.2% yesterday and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.07) and Sell Trade (86.67).  The VIX moved higher for the second day in a row by 8.7%.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.56) and Sell Trade (31.92).


The Euro is starting to stabilize on the immediate term risk management model; 1.22 is an important support that needs to hold.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.22) and Sell Trade ($1.24).


The best acting sector yesterday was Technology (XLK), down only 0.9%.  The outperformance was driven by AAPL +1.4%, as the company announced that it has shipped 3M iPad units in the 80 days since its early-April launch.


The Energy (XLE) sector was the worst performing sector yesterday, down 2.9%.  Both crude and natural gas declined yesterday; with natural gas down for a third straight day.  The E&P group was a notable decliner, with the EPX down 4.5% and the OSX declined 3.5%.  The group failed to garner any reprieve from news that a federal judge in New Orleans lifted the Obama administration's six-month moratorium on deepwater drilling.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade ($77.09) and Sell Trade ($79.54).


In early trading Copper is directionless, after yesterdays 1.7% move to the upside.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.95) and Sell Trade (3.05).


The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,233) and Sell Trade (1,256).  


As we look at today’s set up for the S&P 500, the range is 42 points or 0.8% (1,087) downside and 3.1% (1,129) upside.  Equity futures are trading above fair value after an ugly day yesterday.  Today's highlight is the FOMC rate decision although no material change to the Fed's "extended period" language is expected.


Howard Penney













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