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Heading into yesterday’s close the US market was mixed on extremely light volume.  The S&P 500 closed up one point to close at 1078, while the Russell 2000 closed down 1.2%, to close at 621.  The RISK trade continues to fade despite optimism over corporate earnings and waning concerns over budget deficits in Europe.   


After the close, Alcoa beat recently lowered EPS estimates and commented that demand will remain strong in 2H10.  The news out of Europe is also supportive of higher equity prices as Greece sold bills today at a yield lower than it pays the European Union for emergency loans, although Moody’s cut Portugal’s credit rating on the nation’s growing debt burden and “weak” economic outlook.


Yesterday, strength was seen primarily in Technology (XLK), on the back of Software stocks and a 1.1% rise in the SOX ahead of earnings from INTC +1.6% and AMD +0.3%, which report on Tuesday and Thursday, respectively.  Yesterday, MSFT rose 2.3% on a sell-side upgrade, while AAPL declined 1.0% on the negative Consumer Reports commentary on the iPhone 4.


 Yesterday, Treasuries were mixed and the VIX declined for the seventh day in a row. The Hedgeye Risk Management models have the following levels for the VIX – Buy Trade (23.73) and Sell Trade (29.15).


The dollar index traded up 0.3% on the fading RISK trade.  The Hedgeye Risk Management models have the following levels for the USD – Buy Trade (83.10) and Sell Trade (85.67).


Despite waning debt concerns in Europe, the euro declined slightly on Monday and looking to trade lower for the third day in a row.  The Hedgeye Risk Management models have the following levels for the EURO – Buy Trade (1.23) and Sell Trade (1.28).


Yesterday’s weakness was centered in commodities and commodity-related stocks.  The three worst performing sectors yesterday were Materials (XLB), Industrials (XLI) and Energy (XLE).  In addition, Oil, Copper and Gold declined yesterday; Natural Gas outperformed but still declined. 


Copper prices fell for the first time in six days after a report showed imports fell in China.  Shipments of copper and products into China declined 17% earlier to 328,231 metric tons in June.   Imports have now fallen for three straight months.  The S&P Metal & Mining Index declined 2.6% and coal stocks were down 1.6%.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (2.86) and Sell Trade (3.07).


The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,184) and Sell Trade (1,226). 


Crude oil dropped for the first time in four days as the dollar strengthened against the euro; yesterday Oil fell 1.5% to close at 75.28.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (71.36) and Sell Trade (77.58).  


As we look at today’s set up for the S&P 500, the range is 44 points or 2.9% (1,048) downside and 1.2% (1,092) upside.   Equity futures are trading above fair value, supported by AA earnings trends.  The MACRO calendar heats up toward the end of the week.    


Howard Penney













Touch of Genius

“Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius - and a lot of courage - to move in the opposite direction.”

-Albert Einstein


A lot of political courage it would take to get this global deficit and debtor nation under control Sir Einstein; a lot of courage indeed…


Fortunately, as the US citizenry braces for American Austerity, we are starting to see the early stages of political courage emerge. In the aftermath of President Obama’s “Debt and Deficit Commission” warning him of a “fiscal cancer that could destroy the country from within”, popular websites like Drudge are carrying this as their top story this morning (Drudge Report’s “Debt Like Cancer” at #1 http://www.drudge.com/news/134622/debt-like-cancer).


As the Fiat Fools of the Krugman Empire attempt to make our deficit and debt problems “more complex and more violent”, a Touch of Genius that has always been America’s resolve seems to be finding its way into the daily dialogue of Washington’s Officialdom. This is progress. After 5 consecutive down weeks for the US Dollar, apparently Mr. Macro Market has the world’s attention.


Recognizing risks and TRENDs as they emerge on the margin is the art of global macro. While it’s politically convenient for the perpetual bull market machine to say that “no one saw the sovereign debt crisis coming 6 months ago”, readers of this daily diatribe know better. Our call 6 months ago was the same for the Euro as it is for the US Dollar now. The currencies of countries with burgeoning deficit and debt to GDP ratios are leading indicators for their domestic stock markets.


Fundamentally, our Hedgeyes here in New Haven are chaos theorists. We believe that there is a deep simplicity that governs the global ecosystem and that it manifests itself in high correlations and r-squares. Our daily risk management task is to recognize when immediate term TRADEs (3 weeks or less) are going to become intermediate term TRENDs (3 months or more). Then we call these out as quarterly Macro Themes.


Our Q3 Macro Theme of American Austerity has already hit the tipping point of political consensus. With mid-term elections pending and no recovery in US employment in sight, we don’t think that it is politically palatable for Bernanke and Geithner to take Paul Krugman’s word for it. In the last week we have heard leaks coming out of both the Fed and Treasury that another “bigger, more complex” stimulus is not going to be put on the table. God Bless America for that.


The alternative is that we literally become the Japanese experiment which, by the way, still doesn’t seem to be going too well. In the last 3 days, here’s the news that’s come out of the island nation gone lost decade(s):

  1. After being in office for less than a month, newly appointed Japanese Prime Minister Naoto Kan has already lost support of the upper house.
  2. Japanese equities have lost ground relative to global equities, closing down on both days this week, moving the Nikkei to -9.6% YTD.
  3. Japan’s Public Pension Fund (which holds 12% of all JGBs) sold more government bonds than it bought last month for the 1st time in 9 years.

You see, unlike the USA who levered up their citizenry with the American Mortgage Dream, Japan has opted to suck down the savings base of their people in order to continue to fund their Great Bureaucracy. As baby boomers get older, they have less savings to give and now the Japanese well is running dry. Sound familiar?


Both Japan and Europe have already trekked the road to perdition that the Big Keynesians in America want us to travel. While hope is not an investment process, I do see glimmers of it now that America is learning more than just fear-mongering lessons about great depressions. Americans don’t want to be Japan or Spain.


If American Austerity starts to take hold, it won’t be a bed of roses for all things in your portfolio. The United States of America runs an over-consumption economy that dares the citizenry to lever themselves up and go buy a house or car. That needs to stop. It’s time for some frugality.


Short term pain for long term gain is something that the Chinese, Brazilians, and Australians seem completely in agreement with. To a degree, some European countries that are far more mature than America are getting this too.


The UK is one of those countries that is starting to look interesting to us on the long side – not so much from an equity market perspective yet, but certainly from a currency perspective. Remember, our baseline macro model currently sees currencies as the lead indicator for a country’s budget and balance sheet health.


We bought the British Pound (FXB) in the Hedgeye Asset Allocation Model yesterday taking our allocation to international currencies to the highest of all our asset classes other than cash. We have an 18% allocation to international currencies with a 15% position in the Chinese Yuan and a 3% position in the British Pound.


Until Professional Politicians in the US start to implement the kind of austerity measures that PM David Cameron and Chancellor of the Exchequer, George Osborne, have, we’re going to maintain our short position in the US Dollar (UUP) and US Equities (SPY) against our Chinese (CYB), Singaporean (EWS), and British (FXB) longs.


My immediate term support and resistance levels for the SP500 are now 1048 and 1092, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Touch of Genius - japan


Recently hired a top-line focused, senior manager away from Altira.



The management situation at MGM Macau continues to evolve.  The Joint Venture recently hired Mr. Kwong away from Altira to run the VIP operation for the property.  Mr. Kwong has deep junket relationships and should bring significant volume over to MGM.  He was responsible for the AMAX relationship at Crown/Altira.  The knock on Mr. Kwong is that he is too top-line focused so there is a question of how profitable these incremental revenues will be to the property.  We suspect MGM may be pursuing market share ahead of the IPO and hoping investors believe that margins will follow. 


The second item of note is a potential change at the top.  Our reconnaissance leads us to believe that Grant Bowie's stint at the company may be coming to an end.  His contract is expiring soon and neither MGM nor Pansy Ho appears to be keen on renewing.  We are also hearing that City of Dreams is targeting Bowie to replace the retiring Greg Hawkins at the end of the year.

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It looks like VIP volume has improved in the last four days as World Cup betting came to a close. 



Macau is at a potential inflection point given 1) the beginning of tough monthly comparisons, 2) the slowing China economy and steep drop in the stock market there, and 3) the end of the World Cup.  We are hoping for some clarity on what was actually responsible for the early July slowdown.  If it was just the World Cup, then that would obviously be a positive.  We should be getting mid-month figures by the end of the week for your consumption.  We apologize for focusing on the short term but these are volatile stocks, after all, where upside/downside price target durations are measured in weeks not years. 


Street estimates and management guidance look beatable. Relative valuation looks good.  If only we were sold on this economic recovery.



We’re not buyers of this economic rebound so the defensive MAR looks more attractive to us than most lodging stocks.  Unfortunately, MAR seems only to get relative respect in downturns.  MAR is trading at 10.5x our 2011 EV/EBITDA estimate despite generating 90% of gross profit from fees; 86% of those fees are derived from franchise and base management revenue streams.  As we’ve written about in the past, franchise fees and base management fees deserve a much higher multiple than volatile incentive fees although it doesn’t appear that the Street sees it that way.  Analysts seem perfectly willing to slap on a 14x multiple on total fees generated by HOT regardless of whether they are base, franchise, incentive, or even non-cash fees!  Still, we’d love to get MAR below 10x.


2Q2010 Detail


We’re ahead of the street for 2Q2010 and for the 2H2010 assuming current RevPAR trends continue into the back half.  Our projections are for MAR to print $275MM of EBITDA and $0.30 cents for the quarter, which correspond to 6% and 9% higher than consensus, respectively.  Here are the assumptions.



  • Worldwide RevPAR growth of 6.6%, with ADR flattish across the board but positive for some brands like Ritz Carlton
  • 5.4% YoY increase in system-wide rooms with a 2% increase in managed rooms and an 8.4% increase in franchised rooms
  • Total owned and leased revenue of $261MM and gross margin of $32MM
    • Ahead of the $25MM gross margin explicit in MAR’s guidance
    • We assume that the margin excluding branding and termination fees increases to 4.6%
  • Total fee income of $286MM which would be just above the high end of MAR's guidance
    • Management fees up 10% to $138MM
    • $40MM of incentive fees
    • Franchise fees of $107MM, up 15%
  • Timeshare segment results of $25MM and gross margins of $45MM, at the high end of company guidance
  • Other:
    • G&A of $150MM, in-line with guidance
    • Interest expense of $40MM and interest income of $5MM (below management guidance of $40MM, net)
    • 36% tax rate, in-line with guidance

R3: Revision’s Reality


July12, 2010





In just over a quarter, the world according to earnings revisions and earnings growth for retail, apparel, and footwear is looking like a dramatically different place.  For the first time since November 2008, our index of consensus EPS growth expectations has turned negative.  All the while, positive earnings revision trends have begun to erode along with the group’s multiple (currently just above 14X).  There’s no question that the focus has shifted to the second half, earnings guidance, and tough compares.  What’s most surprising however, is that Street estimates are already in the process of discounting lower earnings.  As such, those holding out on the long side with the “Isn’t everyone already aware of the tough comparisons?” mentality may have a point.


Unfortunately, what is not reflected here is an expectation for a measurable slowdown in the topline, which would render the negative EPS outlook to still be optimistic.  Even at a negative growth rate, things could surely get worse as multiples in the 10x-12x range back in early ’09 indicate.


 R3: Revision’s Reality - 1


R3: Revision’s Reality - 2 





- In an effort to juice city revenues, New York City’s Department of Consumer Affairs is cracking down on a law that prohibits retailers from leaving their doors open while blasting cold air. It turns out, the often used tactic in heavily shopped areas is technically illegal according to a law put in place in 2008. The law, which is clearly aimed at preventing retailers from being wasteful with the A/C (a.k.a energy), carries a $200 fine if violated.


- A report from luxury thinktank L2, sheds some light on the opportunities in China for luxury players. The report suggests that in three years, 840 million Chinese will be online, surpassing the entire online user base of the U.S, Europe, and Japan combined. More importantly, it is estimated that 80% of China’s luxury customers are 45 or below. The combination of the two demographics is sure to make a luxury players salivate, while at the same time adjust their go-to-market strategies beyond traditional high street locations and shop-in-shops.


- Whole Foods continues to the lead the organic and natural industry with its strict guidelines requiring suppliers to verify their product claims. This time, WFMI is requiring personal care and beauty suppliers to substantiate their “organic” claims via third party verification, beginning June 2011. The products will be required to meet the SAME standards as those set for organic foods under U.S law.





Sri Lanka Loses Duty Free Access to EU - Sri Lanka will lose duty free preferential access to the European Union from Aug. 15 for goods valued at 1.24 bn euros, or $1.5 billion at current exchange — of which the most affected are apparel items and fisheries products — following EU claims that Sri Lanka has failed to agree to a set of demands to improve its poor human rights record. EU member states initially decided on Feb. 15 to temporarily withdraw Sri Lanka’s lucrative Generalized System of Preferences tariff benefits, but had given the Asian nation six months to usher in the necessary reforms. The suspension of the GSP+ effectively means that, from Aug. 15, Sri Lankan exports that have benefited from duty free access under the scheme, such as some apparel products like T-shirts, would revert to the standard GSP tariffs, which for apparel is around 9 to 12 percent. <wwd.com/business-news>

Hedgeye Retail’s Take: A stiff blow to a country that is the 13th largest of origin for apparel imports to the U.S. While accounting for only 1.6% imports this will be a far greater issue for Sri Lanka as the U.S. shifts demand to more competitive countries.


Footwear M&A Pace to Quicken? - While consumers are still pinching pennies and looking for deals, footwear firms appear to be in the mood to spend. Mergers and acquisitions are on the rebound, as many footwear companies have built up liquidity on their balance sheets, said industry analysts. The industry is awash with cash after implementing heavy cost-cutting measures last year. Private equity firms are sitting on a lot of stagnant capital, while strategic buyers are seeking ways to plow back their excess funds. Analysts singled out cash-rich companies such as Nike Inc., Deckers Outdoor Corp. and Wolverine World Wide Inc. as being on the prowl for deals. Already this year, the value of global acquisitions of apparel manufacturers, as well as apparel and shoe, jewelry and department stores, jumped 133% to $11.28 bn , according to Dealogic. However, the total value of completed and announced global retail M&A deals is still well below the $29.09 bn seen at this same point in 2007, and no one expects to see that level of activity for some time. <wwd.com/footwear-news>

Hedgeye Retail’s Take: With the tax on capital gains expected to increase in 2011 and beyond coupled with what some refer to as excess cash, we expect activity to remain brisk for the balance of the year.


Rebound in Container Imports Expected to Slow - Import cargo volume at the nation’s major retail container ports is expected to be up 16% in July compared with the same month a year ago, but double-digit increases seen in recent months should taper offer this fall as retailers cautiously manage their inventories, according to the monthly Global Port Tracker report.  <sportsonesource.com/news>

Hedgeye Retail’s Take: With container traffic well above normalized levels YTD (15%+) and compares getting less favorable over the balance of the year this is to be expected, even in light of lean inventories still across much of retail.  


Hot Weather Sparks Sandal Sales - A record-breaking heat wave in the Northeast last week drove consumers into stores, giving a boost to footwear sales. Weather forecasting firm Planalytics Inc. tracked the impact on sandal sales for the week ended July 10, and sales in New York rose 19% compared with last year. When looking at the five-week period from May 30 to July 3, sales in the city were up 13%. Sandals and summer accessories are hot. Footwear retailers in outdoor malls could be negatively impacted because the hot temperatures are not conducive to leisure shopping. Not everyone benefits from the heat as running stores have fewer customers because no one runs in 100 degree temperatures and many people spend more time at the beach in hot weather. <wwd.com/footwear-news>

Hedgeye Retail’s Take:  An end of season kicker to limit seasonal markdown activity.  Add this to the list with air conditioners and sunscreen.


Tariff Bill Would Provide Less Duty Relief for Outdoor Footwear - Outdoor footwear retailers and vendors got mixed news Thursday when the House Ways & Means Committee posted a Miscellaneous Tariff Bill that would restore duty relief on trail runners and other outdoor products retroactive to Jan. 1, 2010, but at higher rates than stipulated in the bill that expired last year. Congress had failed to renew the MTB last year, causing tariffs on rapidly growing categories of waterproof/breathable footwear to rise to the maximum 37.5%. Outdoor Industry Association (OIA) and the American Apparel and Footwear Association have been working ever since to have Congress revisit the legislation, which is typically renewed every two years. <sportsonesource.com>

Hedgeye Retail’s Take: Definite positive for the brands that have exposure here (i.e. TNF, NKE, etc.) as cost relief engenders pricing and margin flexibility in this strong sub-segment of footwear.


Management Changes at Macy's with Fashion Director and LVMH Japanese Chief - Macy’s Inc. has its fashion guru: Molly Langenstein has been promoted to executive vice president of fashion and new business development, establishing the Macy’s veteran as the department store chain’s first national fashion director. It’s the one top national slot Macy’s hasn’t filled since it centralized into a national chain from four divisions last year and seven divisions two years ago, and reorganized the top management with new assignments and titles. LVMH Moët Hennessy Louis Vuitton has tapped Frédéric Grangie, managing director of Goyard, as president and chief executive officer of Louis Vuitton’s Japanese subsidiary, effective Sept. 1. <wwd.com/business-news>

Hedgeye Retail’s Take: With the last position now filled, perhaps we will actually start seeing tangible results from Macy’s centralization efforts? With the hire coming internally for a position open since last year, something tells us this alone might not be the catalyst.


Lacoste To Launch Sub-brand - Clothing and footwear brand Lacoste will launch a new sub-brand in autumn aimed at a younger customer. <drapersonline.com>

Hedgeye Retail’s Take: Yet another retailer getting into the what is quickly becoming a crowded youth category as apparel retailers search for pockets of strength.


Ed Hardy Licensee Bows New Lines - Philip Chemla, owner of the Los Angeles-based Philip Simon Development Inc. footwear firm and longtime licensee for Ed Hardy shoes, is branching out beyond the brand’s signature sneaker look. For spring ’11, Chemla, who founded PSDI in 2002 and has created private-label footwear for Von Dutch and Hale Bob, is readying a line of his own and making moves to establish his company as a prominent industry player. The Philip Simon collection will start with 34 men’s and women’s styles. The women’s offering ranges from flip-flips to stilettos, with a selection of sneakers and casual looks for men. Priced between $39 and $200 at retail, the line is being targeted to major national department stores and larger retailers in the U.S. and across Europe and parts of Asia. <wwd.com/footwear-news>

Hedgeye Retail’s Take: Classic example of a fashion apparel brand expanding into footwear, however this one could have legs given the brand’s strength.  Penetrating national department stores at the same time they’re significantly reducing vendors will likely prove to be the brands greatest challenge – perhaps more so than consumer demand.


Easton Sports Hires Branding Agency - Easton Sports has selected Agency 215 as its branding agency to generate national awareness and excitement for the brand and its sports equipment.  <sportsonesource.com>

Hedgeye Retail’s Take: …with M&A activity at heightened levels in the sports equipment market this reads as a concerted effort to gain visibility perhaps more with potential investors than consumers.


Comfort Trend: Perforations and Cutouts - Comfort brands are keeping things light and breezy, opening up spring looks with perforations and laser cutouts. These airy touches create a cooling effect, while providing plenty of coverage. <wwd.com/footwear-news>

Hedgeye Retail’s Take:  Now if could figure out a way to be long pedicures we’d be in good shape.


R3: Revision’s Reality - 3

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