R3: View From a Mall Tenant


July19, 2010


Mall owners are cutting one year deals to keep vacancy rates from rising.  Retailers are taking the deals to keep volumes up and closures low.  Something may have to give if demand dries up, but for now this may be a win/win for both landlord and the tenant.






We spent some time late last week speaking with FinishLine’s CFO discussing amongst many things, rent.  With Finish Line operating 667 stores, almost all of them in malls, we found the insights telling. CFO, Ed Wilheim, highlighted that landlords are becoming more amenable to re-up 1-year deals at locations that were on the cusp of being closed.  The net effect here is not necessarily more openings, but meaningfully less closures and of course a shortening of lease duration.  While some may be delaying inevitable closures, the reality is this also gives retailers the opportunity to keep volumes at a fairly low cost.  If the environment turns decidedly worse, then we would expect these one year deals to expire with closings. 


Wilheim also noted that the offset to the short-term deals is a less substantial concession on rents themselves, although the costs are generally below pre-recession levels.  Bottom line here is the option to live another day (year) for retailers and mall owners is a win/win for the near-term as long as the demand equation remains status quo.  Clearly the attempt to stem increasing vacancy rates appears to be priority #1 for property owners, especially in light of recent data which suggests vacancies are now at ten year highs.


R3: View From a Mall Tenant - regional mall real estate trends





-A study by Pew Research suggests consumers remain frugal, with 62% of Americans saying they cut back on spending since the recession began in December ’07. Just 6% are spending more over the same time frame. Interestingly, 31% of respondents said they plan to spend less than when the recession began while 12% plan to spend more.


-According to the BrandIndex report, a survey which tracks the most “buzzed” about brands, Lowe’s and Crocs are on the list for the most improved (over the April-June timeframe). The index which measures brand perception, placed Lowes at spot #7 and Crocs at #10 for improvement vs. the prior three months. There were the only two retail or footwear brands on the list. Toyota, Dairy Queen, and SeaWorld rounded out the top three.


- After three years of lackluster air conditioner sales, this summer is shaping up to be one of the best selling seasons in years. While no widespread shortages are reported yet, retailers are expected to sell through inventories this year with very little, if any clearance product. While the heat has created substantial demand, it’s interesting to note that supply, as measured by shipments was down 5.7% going into the season versus a 36% decline in the prior year.





Taubmans Offers Insights on Malls and Real Estate - The Taubmans have a positive outlook on luxury and consumers and contend the draw of a mall, even in the age of the Internet, is still strong. Robert Taubman, chairman, president and ceo said, “We see people with pent-up demand. We have really seen fundamental growth for the first time in a number of years in our fashion category apparel.” Apparel is still the core of the regional mall, he said, adding that luxury concepts are starting to expand again. “There’s clearly been some downward pressure on rents,” he said. “As sales recover, rents will recover as well, though there’s always some lag. There are currently more vacancies, but not materially. There is no permanent disruption to the fundamentals. Women’s retailing represents north of 30% of the Taubman portfolio. Fashion, including women’s, men’s and kids, is about 50%. Is the percentage shifting? Not materially. You see a little more electronics in the mall because of the growth of Apple and Microsoft rolling out. You have more food in the malls. On the other hand, books, records and toys have fallen. Home has also fallen, but not a lot.”  <>

Hedgeye Retail’s Take:  A very optimistic view here that fails to mention that mall vacancies overall are at decade high levels, at about 9%.  For reference, this is just about double the historical run rate we saw  over the past 10 years.


Kantar Retail Report Sentiment Declines on the Margin - Consumers' plans to increase spending during the next four weeks declined by 1% while plans to decrease spending increased by the same percentage, reports Kantar Retail. The consumer tracking service attributes the pull back to the Gulf oil spill and stalled job market. Kantar Retail's poll found that 56% of consumers feel affected by the oil spill in the Gulf of Mexico. In addition, the reporting service says its month-to-month comparisons show signs of waning in credit-card debt, long-term debt and worth of investments. For the upcoming back-to-school season, Kantar Retail reports that 23% of consumers plan to shop versus 30% who did in July 2009. The majority of shoppers surveyed said they will focus their BTS spending for supplies at Walmart (64%) and Target (47%), while apparel purchases will span a wider range of retailers, including Walmart (37%), Target (33%), Kohl's (32%) and JCPenney (27%). <>

Hedgeye Retail’s Take:  Interesting point on the Gulf region, which has yet to show up in the numbers.  We do expect however, the negative impact in the region from the spill to begin to catch up with retail results in the coming months. 


London Retail Sales See Strongest Growth Since 2006 in June - Retail sales in central London in June were 14.4% higher on a like-for-like basis than a year ago, when sales had risen 3.5%. <>

Hedgeye Retail’s Take:  Certainly counter to the overall trends in the UK which remain weak. Perhaps World Cup kits coupled with optimism for the national team were enough to actually move the needle.  Unfortunately, the Cup only takes place once every four years.


Middle East Retail Pulse - Fashion brands point to positive trends in the region, including the return of tourists, particularly in Dubai. Wealthy Chinese are streaming in — picking up the slack from fewer Russian visitors — shoring up a fast-growing destination for Europe’s luxury players even though business isn’t near pre-recession levels. Hermès, which operates five stores in the region, is to open in Beirut, Lebanon, on July 30, with three more stores on the way over the next two years in Kuwait. De la Renta will open three boutiques in the next 18 months. Van Cleef & Arpels, which owns stores in Dubai, Bahrain and Kuwait, is to open a shop in Kuwait this month. Last week, Christian Louboutin was in Beirut to mark the opening of a 1,000-square-foot store and autograph his red-soled styles. Also last week, Louis Vuitton opened its first store in Beirut. Giorgio Armani put his stamp on the Dubai skyline in April, opening a 160-room hotel in the Burj Khalifa tower, the world’s tallest building.  <>

Hedgeye Retail’s Take:  Let’s not forget the Middle East is also a destination for US teen apparel as well.  Recall that American Eagle recently entered the region with stores in Kuwait and Dubai.


Burberry Push in China - Burberry is preparing a vigorous move on the Chinese market after sealing a deal to purchase its retail operations there for 70 million pounds in cash. “This is the biggest deal we’ll do this year, and we’ve been in heavy dialogue about it for the past six months,” Angela Ahrendts, Burberry’s chief executive officer, said in an interview. “Over the past 18 months, we have acquired control of our operations in the world’s four biggest emerging markets: the Middle East, India, Brazil and now China,” she said, adding that 10 new stores are in the pipeline for China this year. “And we are motoring ahead in all of them.” Burberry plans to double its store base from 50 stores to 100 in the medium-term. <>

Hedgeye Retail’s Take:  Sounds like a race between Coach to see which brand can open stores the fastest.  With that said, taking direct control over the brand’s distribution is clearly the right move in an effort to grow the brand in one of the most promising emerging (luxury) markets.


NRF Calls Passage of Landmark Swipe Fee Fix Major Victory - Provisions in the financial services reform bill passed by the Senate Thursday requiring reasonable debit card swipe fees and making it easier for merchants to give discounts to customers who don't use credit cards represent a major victory for retailers and consumers in their fight against card fees. <>

Hedgeye Retail’s Take:  The real question now is where the savings show up.  We’re leaning towards reinvestment in price, although the basis point savings is unlikely to be large enough to drive price elasticity.


Wal-Mart Launches Sleepwear Line in October - Norma Kamali will launch her first line of sleepwear on Oct. 10. The sleepwear, which eventually will be sold in stores, joins other apparel and accessories categories such as dresses, outerwear, sweaters and skirts that Kamali has been designing as a lifestyle brand for Wal-Mart since 2007 under her name. The capsule collection of eight styles, rendered in a butter-soft blend of cotton and Modal, is sized for both the contemporary misses’ customer in sizes XS to XXL and a modern plus-size line in 1X to 3X. Suggested retail for the average-size line is $8 to $12, and the plus-size group is $9 to $14. <>

Hedgeye Retail’s Take:  Nothing wrong with line extensions, but with the merchant organization in flux we suspect there are changes on the way as it pertains to exclusive vs. national brands.  Norma Kamali sleepwear is certainly something that is not a game changer, either way.


Sports Authority Selects Allurent to Boost Ecommerce - Sports Authority has selected Allurent on Demand to add interactive shopping experiences to their core ecommerce website ( and other related brand sites. <>

Hedgeye Retail’s Take:  In advance of an IPO, sprucing up the website makes sense.  Unfortunately, a true “bricks and clicks” strategy is still elusive as long as GSI still runs the platform.


UK Brands Primark, Tesco and H&M To Investigate Alleged Unethical Factory Practices - Primark, Tesco and H&M have been lambasted after an investigation by the Daily Mail claimed that factories contracted by the high street retailers were exploiting its workers, in sweat shop conditions. <>

Hedgeye Retail’s Take:  Social responsibility continues to be top of mind for consumers, and something that can really crush a brand’s image if not addressed properly.  Bottom line, less sweatshops=inflation.


Victoria's Secret Reports Bedbugs at Lex and 58th Street Shop - The Manhattan bedbug infestation that recently forced units of Abercrombie & Fitch and its Hollister sister division to temporarily close their doors interrupted operations at another Columbus, Ohio-based retailer last week when the Victoria’s Secret store at Lexington Avenue and 58th Street was forced to shutter for several hours last Wednesday. VS parent Limited Brands Inc. would only say that it “immediately took action to resolve the situation” and a sales associate at the store declined to provide additional details. Media reports indicated that other Manhattan locations were tested for the problem, but no additional stores were closed. <>

Hedgeye Retail’s Take:  Must be something in the Limited DNA.


Ebay, M-Commerce, and Fashion - Internet giant eBay Inc. has been making giant strides in m-commerce for a couple of years. Its strategy of late is to introduce an increasing number of mobile apps for specific product categories. Now it has debuted eBay Fashion, an app for the iPhone and iPod Touch. Shoppers can use the app to browse, search and buy items from a massive selection of new, designer, branded and vintage merchandise. The eBay Fashion iPhone app offers multiple features to help shoppers find a look and discover new styles, including:

  • A “personalized closet” allowing users to add, store and curate fashion finds in one place.
  • An outfit builder enabling users to mix and match items from their personalized closet.
  • Social media sharing functions so users can share fashion finds via Facebook, Twitter and e-mail.
  • The eBay Fashion Vault, which offers instant access to new, fixed-price clothing, shoes and accessories through exclusive, limited-time discounts on designer brands.
  • A virtual gallery showcasing the latest trends and fashions on the home screen in a slideshow format. Users tap the picture of an item they like to search for similar items available on eBay’s Marketplace.
  • A customized eBay account view from the fashion perspective through My eBay (Fashion), only displaying fashion listings to help users plan their wardrobes.

With more than 10 mm downloads of eBay’s core iPhone application, the company expects to generate $1.5 bn in sales through m-commerce in 2010. Apparel is eBay’s No. 1 mobile category in terms of items sold. <>

Hedgeye Retail’s Take:    Aside from m-commerce in general, the most interesting point here is Ebay’s continued efforts to sell “new” goods.  As the marketplace in the core business model is beginning to max out, Ebay is beginning to morph more and more into traditional first-cost retail.  Keep an eye on further strategic brand partnerships in which Ebay serves as a key distribution point for fashion apparel.



Steve Jacobs and Sheldon might be at odds over the design and operations of Lots 5 and 6.  Could this explain why "real" construction hasn't yet resumed?



Steve Jacobs is Chief Executive Officer of Sands China Ltd and President of Macau operations for LVS.  Mr. Jacobs is very highly regarded in Macau and the investment community.  That is why it is disconcerting to hear that he and Sheldon Adelson may have very different views on the design and direction of Lots 5 and 6.  We don't know the details but the contrasting views are apparently sharp, so much so that Jacobs could be on his way out.  The disagreement could explain the construction delays.  Sure, dirt is being moved from one pile to another but the reason why serious work has not resumed remains a mystery.




As we look at today’s set up for the S&P 500, the range is 46 points or 3.1% (1,032) downside and 1.2% (1,078) upside.  Equity futures are trading above fair value, with little MACRO data points today. 


Consistent with our BEAR MARKET MACRO theme, the potential for a "double-dip" recession gained momentum last week.  Weaker than expected reports on retail sales, industrial production and trade activity this week all showed that economic activity has slowed in the second quarter, suggesting not only a slowing of GDP growth in 2Q10, the but the potential for quarterly GDP contraction in 3Q10 or 4Q10.  Consensus expectations are for stronger second-quarter numbers, with continuing growth for the balance of the year.


The EURO is trading higher (the EURO traded higher 4 out of 5 days last week) despite Moody’s downgrade of Ireland.   The Euro continues to confound the "parity" parrots; now breaking out above our TREND line of 1.27 with the US Dollar in a bearish formation.


Starting out this week there are only two sectors positive on TRADE - Utilities (XLU) and Consumer Staples (XLP) - and the XLU is the only sector positive on TREND.  




According to Street Account, last week there were 23 companies in the S&P 500 that reported earnings. 86% of those companies beat on earnings and 75% beat on revenue.  For the earnings season-to-date, there have been 50 companies report earnings; 84% beat on EPS and 70% beat on revenue.  The EPS trends are only slightly better than the 82% seen in 1Q10.  Historically, it is generally believed that the portion of companies that beat EPS expectations tends to be in the mid 60-70%, with 1Q10 seeing a better than average showing. 


With the exception of the Financials, the takeaways from the first week of earnings are largely positive, with most companies talking up the trends for 3Q10 and the 2H10.  On Friday, the BKX was down 5.7% and declined 4.7% for the week.  This week we will hear from GS and MS.


Last week, Technology (XLK) declined only slightly on the heels of strong earnings from INTC and AMD.  INTC reported a blowout, with revenue and earnings well ahead of expectations and solid top line outlook that comes with a margin expansion story.  AMD followed suit with a similarly upbeat report and commentary.  GOOG kicked off internet earnings with a mixed report - revenue trends remand strong, but increased spending which pressured margins. 


















Last week, 3 of the 8 risk measures registered positive readings on a week-over-week basis, while the remaining five were neutral.


Our risk monitor looks at the following metrics weekly:

1. CDS for all available US Financials (29 companies).

2. High Yield

3. Leveraged Loans

4. TED Spread

5. Journal of Commerce Commodity Price Index

6. Greek Bond Spreads

7. Markit MCDX

8. AAII Bulls/Bears Sentiment Survey


1. Financials CDS Monitor – Swaps were mixed this week.  Twelve of the 30 CDS readings contracted, while 17 widened.  Conclusion: Neutral.

Contracted the most vs last week: MBI, MS, AGO

Widened the most vs last week: AON, ALL, TRV

Contracted the most vs last month: MBI, XL, AXP

Widened the most vs last month: AON, ALL, TRV




2. High Yield (YTM) Monitor – High Yield rates fell 21 bps last week. Rates closed the week at 8.74% down from 8.95% the week prior. Conclusion: Positive.




3. Leveraged Loan Index Monitor - Leveraged loans rose by 10 points last week, closing at 1466 versus 1456 the week prior. Conclusion: Positive.




4. TED Spread Monitor - The TED Spread is a great canary. Last week it remained flat, closing at 38 bps. Conclusion: Neutral.




5. Journal of Commerce Commodity Price Index – The  JOC smoothed commodity price index is a 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 slightly, closing on Thursday at 7.19, down just over 1 point versus last week’s close at 8.59.  Pricing data was not available for Friday. Conclusion: Neutral. 




6. Greek Bond Yields Monitor – Greek bonds yields and CDS show that concerns over debt have not waned.  Last week yields declined very slightly, ending the week at 1025 bps versus 1033 bps the prior week. Conclusion: Neutral.




7. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index will be a useful indicator of pressure in state and local governments.  Each index is a basket of 50 bonds, both revenue and GO, and the chart displayed is the average of four indices.  A volatile week ended up largely flat, as spreads closed at 221 versus 228 a week ago.  Conclusion: Netural.




8. AAII Bulls/Bears Monitor - The Bulls/Bears survey ripped back to the bullish side last week. Bulls rose  by 18.5% to 39.4% while Bears fell 19.3% to 37.8%, pushing the spread to 2% bullish, versus 36% bearish the prior week.  Conclusion: Positive.


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


The Macau Metro Monitor, July 19th, 2010


High Court Judge A.T. Reyes ruled that East Asia Satellite Television (Holdings) Ltd.'s $2.39 bililion lawsuit against New Cotai LL-- accusing New Cotai of deliberating delaying the development of their Macao Studio City project in order to force a renegotiation of the terms of their JV--was "untenable" under Macau and HK laws.  He allowed a separate claim for $88.6 million against Oaktree and Silver Point for “inducing breach” of an agreement to proceed.  East Asia is a joint venture company through which eSun Holdings Limited and CapitaLand Limited have invested in Macao Studio City.  New Cotai, owned by Silver Point, Oaktree and former Las Vegas Sands Corp. executive David Friedman, became an investor in Macao Studio City in December 2006.


David Friedman, CEO of New Cotai, said in a statement: "We are pleased that the High Court dismissed so many of East Asia's claims at this early stage of the proceedings... New Cotai remains well positioned to complete Macao Studio City once the impediments to doing so, including the litigation initiated by East Asia, are resolved."


The court ruling reiterated that the Macau government will reclaim the 6 million sq ft project site if plans don't proceed in the "near future."


According to the DICJ, VIP baccarat increased 98.7% YoY to MOP 32.368 BN in 2Q.  VIP baccarat represented 72.1% of the total GGR, MOP 44.902 BN, in 2Q.  VIP+Mass revenues accounted for 90.6% of the total GGR in 2Q (last year, their share was 87.1%).  Slot revenues rose 32.3% YoY to MOP 2.028 BN in 2Q.


The traditional Chinese game of dice known as Cussec or Big & Small reached MOP 856 MN in 2Q ( 34.2% YoY). Blackjack accounted for MOP 541 MN (25.3% YoY growth), stud poker for MOP 266 MN (16% YoY growth), and roulette for MOP 161 MN (28.8% YoY growth).  In other betting arenas--greyhound and horse races, lotteries, and soccer and basketball bets--, gross receipts totaled MOP 317 MN (50.2% YoY growth).


For 2Q, the number of gaming tables increased to 4,828 (up 17 QoQ) and the number of slot machines increased 156 units QoQ to 14,659.  According to Macau Daily News, industry experts believe GGR of MOP 130-140 MN for 2010 is an "acceptable level".


MelcoLot Ltd has reached a deal to supply INTRALOT's LOTOS Horizon hardware and software to the China Welfare Lottery operation in the city of Chongqing on the Chinese mainland.  MelcoLot is part of the HK-listed Melco Group, under Lawrence Ho.  The contract is for five years with a five-year renewal option by mutual consent.



President Benigno Aquino is considering privatizing the 41-casino chain of PAGCOR.  He stressed that the government will need to determine any irregularities within PAGCOR and come up with steps to remedy them.  "If at some point in time we can do away with having the government be the operator and the regulator, that will be a good direction," said Aquino.



Xia Bin, one of three academic advisers on the PBoC monetary policy committee, believes a higher tax on property transaction would do more than a property tax to cool China's housing market.

Don't Mind Expectations

“Be who you are and say what you feel because those who mind don’t matter and those who matter don’t mind.”

-Dr. Seuss


I got a lot of feedback early last week that I was being too hard on myself. I don’t think I was. For a few trading days the Thunder Bay Bear was getting beaten up by the bulls. I like to call it for what it is that everyone out there sees. There is no hiding from the real-time score.


After Friday’s smack-down close, the US stock market is right back in the fetal position, down -12.7% from its April 23rd cycle-peak and down -32% from its 2007 Levered-Long high. Friday’s earnings out of Google, Bank of America, and General Electric looked nothing like those that we saw from Intel earlier in the week. Across the board, all of these stocks look a lot like the SP500 does from and intermediate term TREND perspective – bearish.


Earnings are cool. They are catalysts that everyone stares at and they can get you paid on both the long and short side. Getting stocks and earnings right are two completely different risk management exercises however - the difference is usually explained by expectations.


At the heart of our American Austerity theme for Q3 of 2010 are the following forecasts about expectations:

  1. US economic growth expectations for the back half of 2010 are too high.
  2. US Dollar weakness (from debt and deficit spending) is a leading indicator for US stock market weakness.
  3. Consensus about US growth, the US Dollar, and US stocks is not yet Bearish Enough.

As of Friday’s closing price of 1064, the SP500 is broken again across all 3 of our core risk management durations (TRADE, TREND, and TAIL):

  1. Long term TAIL resistance = 1096
  2. Intermediate term TREND line resistance = 1144
  3. Immediate term TRADE resistance = 1078

What’s most interesting about this risk management setup is that last week’s closing highs were right at the long term TAIL line (1096). When considered within the framework of longer term expectations, we don’t think earnings season is going to trump the intermediate term slowdown in US growth. Don’t forget that as you get deeper into US earnings season, the earnings get more consumer discretionary (they report last). And as the US consumer goes…


By all measures of consensus expectations, Friday’s Michigan Consumer Confidence reading was a bomb (66.5 vs. 74.5E). For the bears however, it was very much consistent with the continuing intermediate term TREND story line that Americans aren’t as dumb as their government expects them to be.


Dumb? Yes, that’s what Professional Politicians in Washington must think Americans are when they expect consumers to run out and lever themselves up with another mortgage loan. Every day that the Krugman Empire fear-mongers the citizenry into believing we’re going to have another “great depression” is another day when Americans might actually adjust their spending in anticipation of one!


This week’s macro catalyst calendar isn’t going to make Americans any more confident:

  1. Wednesday – Ben Bernanke will issue his semi-annual report to the Senate Banking Committee and likely downgrade his forecast.
  2. Thursday – Bernanke will repeat the same doom and gloom forecast (that doesn’t match up with his GDP forecast) to the House.
  3. Thursday – Existing US Home Sales for the month of June will continue to rattle the cages of the housing bulls (see our 101 slide presentation).

On Friday, European politicians will be trumpeting the results of a made-up “stress test” that already had a prescribed outcome. That could be a positive catalyst, but maybe more so for Europeans than Americans…


You see, the Europeans are doing exactly what American politicians taught them to – make up some healthy “test” results for their banks and hope that the market buys into it. This will continue to provide a bullish intermediate term tailwind for the Euro (bullish intermediate term TREND support = 1.27) and a bearish intermediate term headwind for the US Dollar (bearish intermediate term TREND resistance = 84.74).


Having been a Euro bear for the first 6 months of 2010, I don’t mind consensus expectations for “Euro Parity.” The Parity Parrots all came to the risk management party just in time for us to cover our Euro and European stock market short positions and shift to shorting the currency and equity markets with more relative downside – those in the USA.


We remain short both the US Dollar (UUP) and SP500 (SPY) in the Hedgeye Virtual Portfolio. My immediate term support and resistance lines for the SP500 are now 1032 and 1078, respectively.  


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Don't Mind Expectations - bear

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 80.45%
  • SHORT SIGNALS 78.38%