Five of eight Risk Monitor metrics were worse week over week as of Friday's close, with one neutral and two positive. Greek bond yields continued to climb as Greek CDS broke out to an all-time high last week, but high yield and the TED spread both showed small improvements, on the margin.  We'll keep a close eye on this dynamic in the coming weeks.  

Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (30 companies).

2. High Yield

3. Leveraged Loans

4. TED Spread

5. Journal of Commerce Commodity Price Index

6. Greek Bond Spreads

7. Markit Subprime Spreads

8. AAII Bulls/Bears Sentiment Survey


1. Financials CDS Monitor – After coming down across the board in last week's Risk Monitor, this week credit default swaps ticked back up.  SLM, RDN, and XL saw the smallest percentage increases, while BAC, LNC, and PRU increased the most week over week.   The field is mixed on a month-over-month basis, with AXP, COF, and AIG decreasing the most and ACE, BBVA-ES, SAB-ES, and BKT-ES increased the mostl.  Conclusion: Negative.




2. High Yield (YTM) Monitor - High Yield rates fell 5 bps last week, with a climb in the last few days halting last week's sharp move down. Despite this momentum shift, rates finished at 8.89%, down from 8.94% last Friday. Conclusion: Positive.




3. Leveraged Loan Index Monitor - Leveraged loans were flat last week, rising a fraction of a point, enough to round up to 1464 versus 1463 last week.  Conclusion: Neutral.




4. TED Spread Monitor - The TED Spread is a great canary. It continued to fall last week closing at 40.8 bps down from 44.4 bps in the week prior. Conclusion: Positive.




5. Journal of Commerce Commodity Price Index – The JOC smoothed commodity price index is another useful leading indicator.  A sharp sell-off in this index starting in July ’08 heralded further declines in the stock market.  This week, the index fell from 16.48 the prior Friday to 15.21 last Friday.  Conclusion: Negative. 




6. Greek Bond Yields Monitor - The Greece situation remains in flux and so we include Greek Bond 10-Year Yields as a reflection of that dynamic. Disturbingly, last week Greek CDS reached an all-time high, blowing out above the pre-bailout elevation.  Greek bond yields mirrored this dynamic, increasing 100 bps from 942 to 1042 ahead of the G20 meeting.  Conclusion: Negative.




7. Markit ABX Index Monitor - We use the 2006-2 series and look at the AAA, AA, A and BBB- series. Last week the AAA series moved down, while the other tranches were mostly flat.  We include this measure as a reflection of what is going on in deep subprime distressed paper. Conclusion: Negative.




8. AAII Bulls/Bears Monitor - The Bulls/Bears survey grew more bearish on the margin vs last week. Bulls decreased by 8% to 34.5% while bears rose 1.7% to 32.4%, putting the spread at 2% on the bullish side, versus 12% to the bullish side last week. Conclusion: Negative.


One caveat is that our interpretation of the AAII Bulls/Bears survey is that a more bearish reading is bearish. Most market observers would use this survey as a contrarian indicator, which we wouldn't disagree with from a practitioner standpoint. However, for the purposes of this risk monitor, we treat an increase in bearish sentiment as a negative.





Joshua Steiner, CFA


Allison Kaptur

Exit Spending

“Few men of action have been able to make a graceful exit at the appropriate time.”

-Malcolm Muggeridge


This weekend’s G-20 meetings in Toronto resulted in exactly what Professional Politicians were hoping for – no timeline that they’ll be in office to see through. How’s that for the new era of rhetorical “accountability”?


There were a lot of interesting quotes coming out of the meetings, but I thought the compare and contrast between the the world’s largest Creditor and Debtor nations to be the most poignant:

  1. China’s President Hu Jintao – “The deeper impact of the global financial crisis has yet to be overcome, and systemic and structural risks remain very serious.”
  2. US President Barack Obama – “We can’t all rush to the exits at the same time. What we have to recognize is that the recovery is still fragile.”

After seeing a big sequential deceleration in US economic growth in Q1 of 2010 (GDP dropping to +2.7% from +5.6% in Q4 of 2009), you’d think that the game plan would be for the US to change the plan. Think again. The US government sounds like it will keep pounding Big Keynesian Spending.


In sharp contrast to China’s sequential acceleration in Q1 GDP growth (from +10.7% in Q409 to +11.9% in Q110), as of Friday’s Q1 GDP release US economic growth is headed in the wrong direction all of a sudden. We think consensus growth estimates for the back half of 2010 and beyond look way too HIGH.


This, of course, makes the consensus 2010 and 2011 US deficit and debt to GDP calculations too LOW. As a result, with the world’s eyes hyper focused on these deficit and debt ratios, both the US Dollar and US stock market will remain in very precarious prospective positions.


The ultimate conclusion of the G-20 meetings doesn’t reflect the world that the Chinese or Brazilians would like to see. Remember, these 2 countries have been tightening monetary policy. The goal of “cutting deficits in half by 2013” really ends up being the conclusion that debt-laden-deficit-spending countries need as their stock and bond markets continue to discount that both economic growth and deficits in 2011 will be worse than expected.


The biggest problem with Professional Politicians in Washington right now is that they aren’t proactively nipping this 2011 deficit/GDP problem in the bud. Instead, the US Economic Commander in Chief is trying to push another $55 BILLION jobs bill through the Senate so that he can try to kick the unemployment rate can down the road for a few more quarters to get him through the midterm elections.


This is not the time to ramp up US government spending. It’s time for American Austerity. Or at least something that sounds like it rhetorically (see all Western European countries for the playbook).


The Creditor agrees. Chinese Foreign Ministry spokesman Qin Gang told reporters in Beijing late last week that an appreciating Chinese Yuan won’t solve U.S. economic problems:  “The appreciation of the Yuan cannot bring balanced trade. A strengthening Yuan cannot help to solve U.S. problems of unemployment, overconsumption and low savings rate.”


Not to take sides, but we have to agree with the Chinese on this. We’ll go through this new theme of American Austerity on Thursday when we hold our Q3 Macro Themes Conference Call (email if you’d like to participate).


Whether you agree with the US government calculations of savings and unemployment rates or not is not the big picture macro point we will be making. We get that government calculations are conflicted and compromised – so we simply compare these bad apples to the bad apples reported in years past. While it does get tricky when the government changes the calculations (forcing us to compare bad apples to bad oranges), we can live with our forecasting model.


What we can’t live with is this idea that government spending is good. Not here, not now. America will continue down the Fiscal Road to Perdition until its political leadership comes to grips with the reality that today is still 2010, not 2013.


Both the SP500 and the US Dollar were down -3.7% and -0.4%, respectively last week. For the world’s reserve currency gone fiat, that was the 3rd consecutive week-over-week decline. The US Dollar Index is now broken from an immediate term TRADE perspective ($86.57 TRADE line resistance) and the Euro moves to bullish from an immediate term TRADE position as a result ($1.22 TRADE line support). The exit of spending apparently has a stabilizing effect on a currency.


My immediate term support and resistance levels for the SP500 are now 1068 and 1087, respectively. We remain short the US Dollar Index (UUP) in the Hedgeye Virtual Portfolio.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Exit Spending - apple



On Friday, the S&P 500 got a boost from the end of the financial reform saga and a boost in the RECOVERY trade; the Russell 2000 was the best performing index in the world on Friday.


The Financials (XLF) dramatically outperformed, up 2.7% on the day, as the Banks led the way with the BKX up 2.9%.  With the consensus thinking that the financials “dodged a bullet,” the final impact to business is still to be determined. 


While the sectors leveraged to the recovery trade got a boost on Friday, the latest MACRO data released on Friday does not support the move.  GDP came in slower than originally released and consumer sentiment improved in June.  The 1Q10 GDP (final number) is now 2.7% vs. consensus of 3.0% (personal consumption 3.0% vs. prior 3.5%, GDP Price Index 1.1% vs. consensus 1.17%, and Core PCE 0.7% vs. consensus 0.6%).  


Treasuries finished higher on Friday, with the weaker economic growth numbers.  The dollar index traded down 0.45% on the day and the Hedgeye Risk Management models have the following levels for the USD – Buy Trade (85.21) and Sell Trade (86.57).  The VIX declined 4.1%, but was up 19.1% for the week.  The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.89) and Sell Trade (31.53).


The Euro moved higher by 0.1% on Friday, but declined by 0.1% for the week.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade ($1.22) and Sell Trade ($1.24).


Along with the Materials (XLB) outperforming, commodities also had a strong day on Friday.  Crude and Copper prices were up 3.1% and 2.9%, respectively.  Also, the XAU rose 3.6%; FCX up 4.9%, NEM up 4.6% and ABX up 3.9%.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,241) and Sell Trade (1,259).  The S&P Steel Index rose 2.7% (X rose 2.8% and NUE rose 1.5%). The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (77.70) and Sell Trade (79.45).  


In early trading today copper is trading at a four month high.  Shanghai copper stockpiles decreased by the most in 11 months last week, to the lowest level since the week ended February 19th.  The Hedgeye Risk Management models have the following levels for COPPER – Buy Trade (2.98) and Sell Trade (3.11).


The Consumer Staples (XLP) and Technology (XLK) were the only two sectors to decline on Friday.  The XLP was dragged down by the S&P 500 Beverages Index which declined 2.6% (KO down 3.0% and PEP down 2.6%).


As we look at today’s set up for the S&P 500, the range is 19 points or 0.8% (1,068) downside and 1.0% (1,087) upside.   Equity futures are trading above fair value, as the personal income for May is due out today. 


Howard Penney













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The Week Ahead

The Economic Data calendar for the week of the 28th of June through the 2nd of July 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 - c2

FINL: Clarity on Positive Trends

As a follow-up to our initial thoughts this morning, there are several noteworthy read-throughs embedded in FINL’s Q1 results from this morning’s call:

  • The strength in footwear – particularly running was impressive. Despite basketball and athletic casual footwear comps down double-digits, footwear comps overall were up 12%.   This implies running was ‘running’ at a high-teen to 20%+ rate through Q1.  
  • Apparel underperformed the rest of the portfolio down LSD with a particular weakness in basics.  Given the inherent challenge in trying to differentiate basketball short and t-shirts and to compete with volume based value players, management made it clear that a shift is underway towards more performance product.   Branded business with NKE and The North Face stands to benefit.   Overall this confirms our belief that there are still opportunities for mall-based footwear retailers to sell performance apparel alongside technical footwear.  The good news here is that price points on branded, performance goods are measurably higher than the basics they replace.
  • Inventory management remains a key element to the company’s ability to maintain its impressive sales/inventory spread well above peers.  It was noted that improving turns remains a key focus, but there were probably some areas where orders could have been bigger to meet demand.  Importantly, there’s a divergence within consolidated inventory whereby the company is continuing to aggressively reduce aged/underperforming inventory while at the same time building inventory in key categories i.e. running and toning.  It was suggested that investments in inventory would accelerate heading into BTS relative to recent quarters.  Overall, based on inventory levels from the two largest mall-based players, there is little concern that promotional activity is about to increase.
  • The outlook for net store growth this year improved since last quarter due to landlords increasing willingness to negotiate. While maintaining 8-10 store openings, the company cut the number of closings in half to 10-15 from 20-30. With 200bps of occupancy cost benefits realized in Q1 and approximately 30% of the store base up for some kind of lease action this year, there’s upside to management’s expectation for a 30-40bps annual positive contribution to gross margins.
  • Lastly, traffic continues to be inconsistent– in fact management alluded to this volatility at least a handful of times on the call. While truly a small sample, the latest read on traffic in June is positive. In looking back over monthly trends, traffic was positive in March and then down a bit in both April and May - so far in June traffic is up 2%.  Perhaps just a sign of comping last year’s rebate checks, we struggle to view a positive early read on traffic as anything other than just that – positive.


With an even more favorable quarter ahead for FINL in Q2, coupled with further gains in sales productivity, product margin, occupancy cost and e-commerce, our view is that the company is on track to exceed recent peak margins of 8.3%.  As a leading athletic footwear retailer, FINL is one of the most direct ways to play the multi-year trend underway in the athletic footwear space.  We continue to believe that this is not a zero sum game and that there is more than one investible opportunity to capture the athletic cycle tailwind.  Importantly, Finish Line’s success has little bearing on our bullish outlook for Foot Locker.  We remain comfortable with our positive bias on both names following these results.


Below is additional color from the Q&A of today’s call:





Pricing - Vendor pass-throughs:

  • Vendors not pushing through price increases above and beyond expectations
  • Product in the $115 zone from SKX well received

SG&A Control - Labor Management/Commission Program:

  • Store labor costs for Q1 were flat in $$
  • Evaluating commissions program in a couple of markets and will be expanding to add'l mkts throughout the year
  • Store labor tool schedules labor according to traffic
  • Mgmt comfortable with LSD decline in SG&A over the balance of the year, 5%+ sounds aggressive

Inventory Mgmt vs. Comp Outlook:

  • Mgmt still sees upside on inventory turns
  • Aging inventories continue to improve
  • Seasonal carryover (i.e. boots) work to flush ahead of next season
  • Reducing less relevant inventory - growing inventory in categories driving growth e.g. Running and Toning
  • Planning to ramp inventories only in key growth categories

Comps - Traffic:

  • Traffic positive in March and then down a bit in April and May - so far in June traffic is up 2%

Comps - Trends:

  • Compares volume August is ~40% of the qtr, June/July the balance
  • June was 9% of total business in 2008, 7.7% of total sales in 2009 - mgmt planning on 8% this year

Balance Sheet - Uses of Cash:

  • Investing in the core business to drive growth
  • Strategic initiatives/Acquisitions
  • Looking to invest outside of the core brand
    • Potential buyback when shares at attractive levels

Gross Margins - Product Margin:

  • Compares get tougher going forward
  • Had mentioned 30-40bps contribution from product margins in FY11, obvious upside given +180bps in Q1

Running and Toning Inventory Levels:

  • Looking to invest in inventory here - key drivers for BTS
  • Levels are very lean after two quarters of -20% and -18% respectively

Exceeding Prior Peak Margins:

  • Optimistic they can exceed peak margins by:
  • Driving sales and increasing sales productivity in stores (~$300/sq ft last year, up 11% this qtr)
  • Product margin improvements
  • Occupancy savings a source of upside
  • continues to grow well and at a more profitable rate

Toning Innovation:

  • FINL has tested new product from Skechers at higher price points and different aesthetics with 'good' reception
  • New entrants still aggressively hitting the category

  • Average ticket runs +30% premium to average transaction in-store
  • Driven by footwear
  • Expanding assortment on the internet that they couldn't typically carry in stores - particularly apparel

Product Initiatives in June/July:

  • NKE AirMax10 in malls since May - adding some new colors
  • Lunar new models
  • Reebok ZigTech - took decent inventory for March Launch, ramping that based on success and rate of sell-through
  • Q3 and beyond, Reebok


  • Down LSD driven largely by seasonal product (e.g. basketball shorts, t-shirts, etc)
  • Branded business (NKE, TNF) was positive and look to grow as a % of sales going forward

2H Outlook:

  • They had built a plan that assumed flat to slightly down comp at the end of last year so environment still very favorable
  • Now willing to make some more investments and take more risks within reason based on strong demand


FINL: Clarity on Positive Trends - FINL S 6 10


FINL: Clarity on Positive Trends - SG Aggregate 6 10


Casey Flavin


BBBY: Subtle Conservatism

There’s little value in rehashing the finer points of yet another solid quarter from Bed Bath and Beyond.  Let’s be upfront and recognize that the opportunities ahead have very little to do with the past.  At least that’s the sense I get after talking with numerous investors over the past week.  So putting aside the above-expectation and above-plan same-store sales, the near $1.6 billion in cash on the debt free balance sheet, and the guidance which remains unchanged (and still conservative), the market seems to have made up its mind that this is as good as it gets.  At the same time, this also appears to be the sentiment towards most retailers.  And, perhaps this is fair given the optics ahead.  There’s no question that same-store sales will slow as the company butts up against more challenging compares beginning on Q3.  The same holds true for inventory management, which showed a tick down in its spread relative to sales and is no longer being cut at the same rate.  We knew the day of tougher comparisons on the horizon would come and we’re now one quarter away.  But, what’s new?


Despite what may be a near-term disconnect between tomorrow’s expectations and those in the intermediate term, we still believe there is ample opportunity for earnings to exceed expectations over the remainder of the year and into next for BBBY.  The key here is recognizing that EBIT margins are still about 100 bps off peak in an environment that is less competitive, has far less capacity, and is not overshadowed by aggressive promotional activity (i.e couponing).  We believe the company is almost half way through the process of unwinding the heavy use of direct-mail coupons and coupon inserts that were very much a part of a three-year trend in gross margin erosion.  At the same time, square footage growth remains a healthy 5% and the likelihood for additional share repurchases remains high.


Finally, a point about the elephant in the room, a.k.a sell-side concerns about a slowing topline coming into the earnings print.  There was absolutely no evidence in our view on the conference call to  suggest that sales have slowed.  The guidance for 2Q same-store sales stands at a mid-single digit increase.  Recall that guidance has called for a mid single digit increase since the end of 3Q09.  The question will be is this the “real” expectation, or is this a case of subtle conservatism?  We believe it’s more likely the latter.


Our view remains unchanged on the opportunities that still lie ahead for the shares.  We still believe earnings will grow by at least 25% for the year.  This is now the fourth quarter in a row in which gross margins have improved, after 10 quarters of declines.  We can’t fight a growing level of bearishness permeating the retail space, but we can and do remain objective on the fundamental opportunities that still exist for the shares.


BBBY: Subtle Conservatism - 6 23 2010 6 39 07 PM


Eric Levine


Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%