Chinese Ox . . . Boxed By Leading Indicators

Conclusion:  Consistent with prior Hedgeye research, Chinese leading indicators indicate a forthcoming slowdown in economic activity in China.


The Conference Board’s Leading Economic Index for China was revised lower today to 0.3% from the prior report of 1.7%.  The key change in the data was the calculation of Total Floor Space Started.   Originally this data was reported to have contributed 1.3 percent, but was revised lower to negative -0.1% in April.


In April three of the six components that make up the LEI increased.  These positive contributors were: PMI supplier delivery index, total loans issued by financial institutions, and the raw materials supply index.  Conversely, the three components that declined in April were: consumer expectations, the PMI new export order index, and the total floor space started (as noted above).


With April’s gain, the six-month annual growth rate of the leading economic indicators continue to moderate, down to 3.3% (a 6.8% annual rate).  This is a marked deceleration from the prior six months period, which grew 4.9%, or 10.0% on an annualized basis.


Clearly, we are starting to see evidence of the Chinese government’s cooling measures, and that the second derivative of Chinese growth has peaked.  The question remains: Is this priced in?


On June 10th, we wrote a note that concluded, “China is starting to look interesting on the long side, as the stock market has priced in slowing economic growth.”  Based on the price action over night in China, the Shanghai Composite was down over -4%, the answer seems to be clear.


The combination of the downwardly revised leading indicators and the fact that the Agriculture Bank of China (the third largest lender in China) capped its IPO at a lower than expected range (signaling lower demand for Chinese equities than expected), suggests that Chinese equities are still better for sale.


Daryl G. Jones
Managing Director


Chinese Ox . . . Boxed By Leading Indicators - 1

R3: Q1 Retail Outliers


June 29, 2010


A tough 2H10 for US retail is not a difficult concept to internalize. But the value for us is to increasingly pick out those companies who are showing the biggest change on the margin, and face the most positive/negative setup into 2H.





Things are not looking pretty for the Softlines Industry as it relates to the back-half setup. That’s not a difficult sell for us. But the value for us is to increasingly pick out those companies who are showing the biggest change on the margin, and face the most positive/negative setup into 2H.


Here is a quick overview of how to read the chart: the vertical axis illustrates the difference between sales growth and inventory growth, while the horizontal axis represents the year to year change in the operating margin. We then plot the past 8 quarters of data to the trace historical trend (that’s the yellow line in the chart below). The punchline is that companies should always strive to be headed to the upper right hand quadrant (sales outpace inventories and margins up). The background to the SIGMA chart has the year to year changes in gross margin and SG&A margin, along with a line representing capex as a percent of sales on a trailing twelve month trend. This allows us to track margin and cash flow compares we’re looking at on a quarter‐to‐quarter basis.


R3: Q1 Retail Outliers - 1


Today, we are looking at 73% of the 109 companies we monitor lying in the ‘sweet spot’ (sales growth outpacing in inventory growth, and margins headed higher), which is up from a mere 50% in 3Q F09 and the 61% in 4Q F09. With favorable comps in the rear-view for most companies, it’s now time to comp against more challenging Quadrant 1 compares proving either a multi-year margin expansion process is indeed under way, or fall victim to SIGMA gravity and a round trip to Quadrant 3 – the inevitable outcome for most retailers who are more dependent on the fate of the consumer instead of proactively driving their own business.


Within each quadrant, here is a list of those that we think stand out as it relates to how the P&L and Balance Sheet are triangulating with expectations heading into the second half of ’10.


R3: Q1 Retail Outliers - 2


As one might imagine, the stock performance associated with moves from one quadrant to the next are meaningful. Whenever a company moves out of Quadrant 1 – or even heads to a less attractive place in that quadrant we normally see an associated negative stock move. And I’m not saying ‘sometimes it is a negative‐ish move.’ We’re talking a .90x R2 with the average move squarely in the double digits.


We have a SIGMA book with 109 companies, which helps our team (and our exclusive Retail vertical subscribers) focus on which companies are interesting and at what time they become actionable. Let us know if you’re interested.


R3: Q1 Retail Outliers - 3


Casey Flavin






- After a successful collaboration with Target earlier this summer, Liberty of London has sold itself to private equity firm, BlueGem. The retailer is known best for turning itself around through successful and plentiful collaborations with numerous brands including Manolo Blahnik, Nike, and of course Target.


- Best Buy’s Twelpforce Twitter service received the Titanium Grand Prix award for its innovative efforts to improve customer service via technology. The jury went on to describe the Twitter effort as a “business changing idea”, something we agree with. The ability to Tweet a question to a live person, have it distributed amongst a sizable network of qualified customer service agents, and to get a credible (and non-computer generated) response truly is a new standard for which consumers can hold retailers accountable.


- A sneak peak of Abercrombie’s upcoming re-launch of its “Quarterly” reveals a throwback to the racy imagery of years past. Ironically, the magalog exists to sell apparel, while it appears that the models are wearing very little.





Prada Eyes IPO in Q1 2012 - While the brand has been down this road before, the company has several reasons to make it happen on the fourth attempt. First, the timing coincides with the expiration of Prada’s loan of 450 mm euros granted by a string of banks. Second, Prada’s business continues to boom. According to a spokesman, the Prada Group today is valued at 3 to 4 bn euros. While the IPO will depend, as always, on market conditions, Prada is reaping the benefits of its plan to invest in directly operated stores. The aim is to generate more than 70% of consolidated turnover from directly operated stores next year. <>

Hedgeye Retail’s Take:   Again the timing is beginning to become suspect as macro headwinds build.  With that said, this is still one of the few iconic luxury brands in private hands.  Perhaps Mr. Armani will be watching this one real closely. 


Retailers Still Slow to Mobile Commerce - Nearly two-thirds of apparel, accessories and footwear retailers either don’t have a mobile-commerce strategy in place or are just getting started on one, according to a study on “The State of Online Retailing” released today by Forrester Research Inc. and 15% of the 26 apparel, accessories and footwear retailers included in the study said they had no mobile strategy, and another 50% said their strategy was at an early stage or just being developed. 19% said they had a strategy in place and were implementing or refining it, 12% said they had a strategy and were starting work on implementing it and 4% said they had a strategy. Overall, the study said, mobile is responsible for 2.8% of online retailers’ site traffic and 2% of their Web revenue. <>

Hedgeye Retail’s Take:  Given retail’s track record on embracing technology, none of this is surprising.  Until there is a more defined mobile platform, it’s likely that the industry treads lightly before committing meaningful capital to mobile efforts.  With that said, mobile commerce is all about customer satisfaction, something most retailers still have an opportunity to improve upon. 


US Slow to Join Trade Agreements - Regional and bilateral trade agreements are proliferating worldwide without American involvement, raising industry concerns the U.S. could fall behind in the race for global trade benefits. U.S. sentiment toward trade agreements has soured in many parts of the country, making it politically challenging to move forward with new pacts. At risk for apparel companies is access to export markets and the availability of production capacity with key suppliers. Even retail sales in stores overseas could be impacted if U.S. companies were forced to compete with firms from countries with better trade benefits in a specific market, experts said. While nations around the world are rapidly signing as many agreements as they can negotiate, the U.S. has initiated one new negotiation to join the Trans-Pacific Partnership, a process that sources expect could take several years to complete. <>

Hedgeye Retail’s Take:   It’s one thing to protect U.S jobs, but another to protect jobs in an industry that barely exists today.  The fate has been sealed for domestic apparel manufacturing and it certainly would be more useful for politicians to spend their time elsewhere. 


PVH to Push European Presence Through Key Show in Berlin - On July 7, Calvin Klein will stage its first multibrand presentation in Germany at Die Muenze. Lacoste, meanwhile, will launch its Legends footwear collection at Bread & Butter. The Bread & Butter is one of the most important fashion fairs in Europe, with a lot of visitors mostly from the clothing area coming from many European countries, including Germany, Holland, France, Italy, Spain and the U.K. <>

Hedgeye Retail’s Take:  Don’t chalk this up to being an irrelevant European show. A coordinated effort in a forum that is as meaningful as the Vegas/MAGIC show makes sense to us.   


High Court Strikes Down Chicago Gun Ban, Says 2nd Amendment Applies Nationwide - In a recent development of significant relevance to the firearms community and otherwise, the United States Supreme Court has ruled to strike down the ban of private ownership of firearms in Chicago, IL, an historic decision that will have monumental implications across the nation.  <>

Hedgeye Retail’s Take:   Some are speculating that the strength in firearm’s sales could slow even further, as the rush to buy firearms ahead of potential law changes no longer exists. 


Former G.I. Joe's Managers Loses Lawsuit to Regain Name - Four former executives of G.I. Joe's have been thwarted in their attempt to bring back the Pacific Northwest chain. Ron Menconi, Joe's former vice president of marketing and merchandise who had served as the new company's president, told The Oregonian, "All I can say is that our project is not going forward. We're not bringing back the company, let's put it that way. We're very disappointed." <>

Hedgeye Retail’s Take:   Valiant effort, but did it really make sense to bring back a brand that failed and would now have to compete with Dick’s?


Adidas Aims to Keep Leadership in Golf Market With Radar Analysis of Swing - Adidas AG , the maker of TaylorMade golf clubs, said it plans to maintain its newfound position as the sport’s biggest supplier with the help of computer images and radar systems that analyze players’ swings. <>

Hedgeye Retail’s Take:   Innovation is the only way golf will grow, so we say bring on the radar.  It will be interesting to see which retailers embrace the swing equipment.  Historically these gimmicks end of being out of service more than not, leaving the consumer disappointed and the stores cluttered with old equipment. 


Uniqlo Broadening Asian Presence By Entering Malaysia - Uniqlo’s corporate parent Fast Retailing Co. Ltd. said Tuesday it has formed a joint venture with DNP Clothing Sdn Bhd to open and operate stores in the Southeast Asian nation. Uniqlo is shooting to open its first store in the country this fall or winter, a spokeswoman said. She added that it is too soon to estimate how many more stores the brand will roll out in Malaysia. Fast Retailing owns 55% of the joint venture. Uniqlo is ramping up its presence in Asia. The fast-fashion brand, which is known for its affordable basics and fabric innovations, will open its first store in Taiwan sometime this fall. Its existing retail network includes stores in Hong Kong, Mainland China, South Korea and Singapore. <>

Hedgeye Retail’s Take:  World domination continues!  Expect to see Uniqlo everywhere it makes sense, as the company heads towards its goal of being the world’s largest apparel retailer.


Macy's Ramps Up Destination Maternity Apparel Partnership - Macy’s Inc. on Monday revealed a deal to sell Destination Maternity Corp.’s apparel in more than 615 department stores by the end of February. The Philadelphia-based maternity clothing retailer currently has leased departments in 113 Macy’s stores. In other news, Destination Maternity is collaborating with Reebok on a collection of maternity activewear that will be available exclusively at the company’s Motherhood Maternity and A Pea in the Pod stores following a September launch. <>

Hedgeye Retail’s Take:  Another point of differentiation, this time for expecting moms.  Clearly the partnership was already working given the partnership is expanding beyond the original arrangement.


KSS's Britney Spears New Candies Line - Kohls will unveil on Thursday a limited edition, co-branded collection from Candie’s, and Spears, who, over the past couple years, has rehabilitated her image from that of a head-shaving, umbrella-wielding, Kevin Federline-divorcing basket case back into a chart-topping pop star who sold out arenas in her highly successful 2009 “Circus” concert tour. Despite Spears’ checkered image, Kohl’s and Candie’s are betting she can lure her legions of fans — this summer she became the first person ever to reach five million Twitter followers — into stores to buy the new Britney for Candie’s sportswear, handbags and jewelry collections. The collection includes three deliveries, in July, September and October, with all merchandise retailing for $14 to $78. <>

Hedgeye Retail’s Take:    Is Britney still relevant to the core Candie’s customer?  We suspect there is a new Candie’s girl on the horizon…


Heely's to Role Out New Shoe - Next month will roll out a new shoe style called the Hx2, aimed at a younger market. Unlike Heelys’ current single-wheel styles, the Hx2 features two removable wheels in each shoe, making it easier for younger kids to maintain balance. It also does not require as much leg strength for heel skating. Two-wheel versions of Heelys have been popular in Japan for some time, with sales last year surpassing 300,000 pairs. However, the Hx2 marks the first two-wheel Heelys style available in the North American market. <>

Hedgeye Retail’s Take:  If the original shoe was controversial at times due to safety concerns, we wonder how an even younger target audience is going to stay injury free? Adds Households Essentials to its E-commerce - has launched a new Households Essentials section of its e-commerce site that will offer consumers such everyday items as toothpaste and laundry detergent. The goods will be sold by, a startup that works with consumer goods manufacturers to sell their products directly to consumers via the web.’s Households Essentials store will offer nearly 8,000 SKUs. <>

Hedgeye Retail’s Take:   As long as there is free shipping we can see buying these small ticket items online.  With the CPG companies behind, we suspect the pricing will be compelling as well.


Neither Macau nor China made it to the 2010 World Cup Tournament but betting there is fierce and may be impacting Macau.



We figured the 2H of June would slow in Macau due to the strong holiday celebration in 1H.  However, while not exactly sluggish, volumes have slowed more than we thought.  As we pointed out yesterday, gaming revenues may increase 67% for the full month of June Y-o-Y versus our mid-month projection of 74-80%.


Our sources are indicating that there has been a significant increase in the volume of World Cup betting with the many black market bookies. These matches receive individual bets in the millions of HKD and the volumes involved are enormous. We expected some betting on the group stage matches but a real acceleration from the round of 16 onwards.  The fact that betting has already been high could indicate that Macau gaming revenue growth could slow even further in the coming weeks (final match is on July 11th) as wagering is channeled away from the Macau tables toward the illicit sports books.  There are fewer matches occurring now but with much more interest.  Volume is probably in the billions, and could be in the tens of billions. That cash exodus would have to have an impact on the Macau market, but obviously only a temporary one.


Remember, July is also the first month in 2010 facing a positive year over year comparison.


The Macau Metro Monitor, June 29th, 2010




Local gaming revenue growth could be “relatively flat” in 2H 2010, Sands CEO Jacobs told Reuters yesterday.  Jacobs added that he believes in DICJ's forecast of 30% growth for 2010 and that a more flexible exchange rate between USD and RMB would “positively impact” the casino industry.  Again, Jacobs said imported labor laws are not impacting hiring at sites 5 & 6.


Construction on Sands' sites 5 & 6 on Cotai “could explain” the creation of 2,300 new jobs in May, according to economist Henry Lei.  This was the highest monthly increase in two years, since August 2008, when 2,600 people found work.  Lei also mentioned that the May 1 demonstration could have impacted jobs as the government “may have posted certain pressure to different local companies to open new vacancies for local workers.” 



CBRE forecasts some 4,000 new homes were sold in 2Q, lower than 1Q's figure of 4,380.  Also, CBRE estimates a 15-20% decline in resale homes sold in 2Q.



According to CEO Jacobs, Sands China seeks to partner with a Chinese airline flying to Macau. Sands is also interested in starting low-budget, 2-4 days package deals.  About 85% of Sands' customers come from mainland China.  Air China Ltd., China Eastern Airlines Corp.’s Shanghai Airlines, Air Macau and Xiamen Airlines are among the carriers that have flights to Macau from mainland China.



Part of MGM's One Central complex, the 213-room Mandarin Oriental Hotel will open today.  Two weeks ago, the Mandarin Oriental Hotel Group announced an agreement to brand and manage 56 residences and 36 apartments that are located above Mandarin Oriental.  “The Residences & Apartments” in Macau plan to open in 2011 as the first Mandarin Oriental residential project in Asia.


According to the new version, Macau’s 2010 budget is now estimated at MOP58.87 billion (including autonomous agencies), an increase of 12.3% in comparison to the previous forecast.  Direct taxes from gaming totaled MOP24.01 billion, representing 84.5% of the public finance revenue between January and May.



Eligible Macau residents are expected to receive cash handouts as well as the MOP 10,000 start-up capital for their central saving accounts from the Government at the end of July.  Each eligible Macau permanent and non-permanent resident will be able to get MOP 6,000 and MOP 3,600 respectively, the same amounts as in 2009.  About 300,000 eligible residents will receive notification letters within the next month.  

Get Dupe(d)

“The US government has a technology, called a printing press, which allows it to produce as many US dollars as it wishes at essentially no cost.”

-Ben Bernanke


One of the most poignant Hedgeye sayings is “austerity equals civil unrest” and it has become increasingly clear that Obama wants nothing to do with austerity.   It’s also clear, judging by developments at the G-20 weekend, that the US is going to try to go it alone with big fiscal imbalances; our submission is that the USA balance sheet can’t sustain the current trend and one of the biggest losers will be the American consumer.  As the Bernanke & Co printing press continues to roll on and on, piling debt upon debt upon debt, this can only end badly.


As of the close yesterday, Consumer Discretionary was one of only three sectors up year-to-date (XLY up 2.7%).  The other two are Industrials (XLI up 3.3%) and Financials (XLF up 0.7%).   While easy comparisons and “corporate” fiscal austerity have helped the performance of consumer stocks, the best days of this cycle are behind them. 


I know everyone has a view on the consumer, but there are some changes on the margin that should be considered as we look toward 2H10.  One of our 1Q09 Macro Themes was “MEGA” – calling for a MEGA squeeze in consumer stocks with Mortgage Rates going down, the Employment picture turning around, Gas prices declining sharply year-over-year, and Asset prices re-flating.  Looking at the data as we emerge from 2Q10, it is clear that the American consumer is now going to get DUPE (d) and is not going to be happy.


Double-Dip:  The housing market and the broader economy are on the precipice of a double dip; housing prices have already started to decline and the economy has slowed significantly quarter-to-quarter in 1Q10.  The Hedgeye Risk Management Financials team recently presented a very strong case for why the housing market is in trouble.  We have high conviction that a double-dip in housing is underway and this will have a serious impact on consumer behavior.  Following a decade of out of control spending, the state of the USA’s balance sheet inhibits the country’s ability to navigate the structural issues still present in the economy.   A few points to keep in mind include:


(1)    The benefits from the current Obama stimulus peaked in the 1Q10 - Slowing GDP growth.

(2)    In 2011, taxes are going up and that will hamper economic growth  - Slowing GDP growth.

(3)    Real estate prices are estimated to decline 20% in the next twelve months - Slowing consumer spending.


Unemployment:  Weekly Jobless Claims have not shown any material improvement over the past six months.  Private sector job creation remains a concern; private-sector job creation in May decreased sequentially from April.   While private sector job creation had been growing for four straight months, it has now come to an impasse as businesses have become nervous about the state of the economy.   Unemployment is at an elevated level and indicates a continuing softness in the underlying economy.  As census workers are laid off, the rate could jump higher unless other sources of employment pick up hiring drastically.  Uncle Sam is running out of crutches (or the political will to supply them):


(1)    The Administration failed to get Congress to pony up an extra $50B for unemployment claims - our leveraged balance sheet inhibits the government’s ability to provide stimulus. 

(2)    A strong dollar policy has proven to help job creation – Bill Clinton and Ronald Reagan were the last two presidents to oversee true job creation and both pursued strong dollar policies - to be sure Obama is debauching the US currency.

(3)    As the Double-dip scenario pays out, unemployment will remain elevated and may even go higher. 


Prices Paid by the Consumer:  While reported inflation by the government looks to be under control, the Hedgeye Inflation Index tells a different story.  The Hedgeye Inflation Index focuses on the part of the economy showing inflation that impacts the consumer, specifically the spread between the prices of things they buy and what they earn.  Looking out over the next 6-12 months (and even longer) consumers will be paying more to drive their cars, or “bring home the bacon” and to make sure they have health insurance for their family.  The issues that arise from the disaster in the Gulf of Mexico will not be solved by the cash flow from BP.  The government has been sponsoring cheap gas prices in the US for years and that will come to an end.  Once again, the government cannot afford to manage through the issues the country faces due to the leveraged balance sheet.     


(1)    The Hedgeye Inflation Index turned ugly last week.

(2)    The disaster in the Gulf is inflationary and will be a drag on growth.

(3)    The prices paid by the US consumer for gas is far below the rest of the world and there is a possibility that the gap could close significantly under pending energy legislation – this would be a massive headwind for the consumer.  Some commentators are speculating that prices could rise to meet those paid at the pump in Western Europe – some 50% higher than where they are currently.


Equity and Real Estate deflation:  We believe that the debasing of any currency (even the Almighty Dollar) ends badly.  A lack of austerity in government policies and an aversion to facing facts among our professional politicians is not helping the long-term outlook for equities.  The VIX’s 19% up-move week-over-week, along with the move in the equity market, indicates that political summits are doing little to ease fears.  On Thursday the Macro Team is going through our Hedgeye Risk Management Q3 Themes.  If you would like access to that conference call, please email .


(1)    U.S. equity markets have lost $1.78 trillion since April 23 on concern the European debt crisis will spread. 

(2)    China declined 4.2% last night and is now down 26% year-to-date. 

(3)    The S&P 500 is down 3.6% year-to-date. 


Last week, the University of Michigan consumer confidence index improved for the month of May and yesterday, the government reported that the consumer is spending less than he/she earns.  In both cases the market ignored the data and has moved lower.  We don’t trust what the government is telling us nor the direction in which the country is headed.  The consumer is not stupid and Washington does not get it.


Function in disaster; finish in style


Howard Penney 


Get Dupe(d) - trust


We expected the 2H of June to slow, but not this much.



The following table shows June Macau gaming revenues through the 27th.  Clearly, business has slowed over the past week or two.  Based on the HK$11.7 billion in MTD table revenues, we are now projecting HK$13.5 billion in total gaming revenues (including slots) for the full month.  Our previous projection was HK$14.0-14.5 billion or 74-80% Y-O-Y growth versus our new projection of “only” 67% growth.  This could be a small negative on the margin for Macau stocks.


Since our mid-month note, LVS gained some share at the expense of SJM and MPEL.



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 80.46%
  • SHORT SIGNALS 78.35%