• run with the bulls

    get your first month

    of hedgeye free


Weimar Republic

“I must begin by saying something about the old Germany. That Germany, too, suffered from superficial judgment, because appearances and reality were not always kept apart in people's minds.

-Gustav Stresemann


Last night in thinking about a theme for the Early Look I read an article by John Williams and the concerns he has about the current economic policies.  The article was an extreme view, as he believes that the U.S. economic and systemic solvency crisis of the last two years are just precursors to bigger problems: this crisis and others in the past are being brewed by the federal government and the FED’s malfeasance.  


One of our key themes for 3Q10 is “American Austerity”, a key tenant of which is that the “Fiat Fools” in Washington are dedicated to preventing deflation and the subsequent debauching of the U.S. dollar. The article by John Williams takes this to an extreme and uses the period in German history called the Weimar Republic as a case in point. 


According to Wikipedia, the Weimar Republic is the name given by historians to the parliamentary republic established in 1919 in Germany to replace the imperial form of government.  It was named after Weimar, the city where the constitutional assembly took place.  In its 14 years, the Weimar Republic was faced with numerous problems, including hyperinflation, political extremists on the left and the right and their paramilitaries, and hostility from the victors of World War I.


Post-World War I, Germany was a country that was financially and economically depleted as a penalty for losing the war.  By late 1922, the German government could no longer afford to make reparations payments, in keeping up with the Treaty of Versailles.  As such, paper money was printed, the market collapsed and foreign investors withdrew their capital.


The Weimar circumstances and its heavy reliance on foreign investment reminded me of our relationship with the Chinese and how dependant we are on them and their confidence in the US Dollar.  Unfortunately, this may not always be the case.   See our post from 7/16 “Watch What They Do, Not What They Say . . . The Chinese Are Selling Treasuries.”  There is a reason why Timmy has taken a kind and gentle approach with the Chinese and their Yuan policy.


For the time being, the “Fiat Fools” in Washington can rest knowing the government contrived reporting of inflation is benign.  Last week the BLS reported that consumer inflation appears to be under control - but for how long? 


It’s only a matter of time before inflationary pressures will begin to surface from the debauching of the US Dollar.  A weakening U.S. dollar will continue to put upside pressure on dollar-denominated commodity prices, which in turn push inflation higher in the system.  The key here is that it’s not inflation generated by strong economic demand, but by policies driven by “Fiat Fools.” 


The implications of the recent rebound in the Euro (and the subsequent decline in the Dollar) suggest that market concerns already may be shifting from European solvency issues to those of the United States, but not so fast. 


Since the Euro’s low on 6/7 it has rallied 8.5%, but it does not look like the Euro zone is out of the woods yet.  As Daryl Jones, Head of Hedgeye Macro Strategy, noted, “three month Euro LIBOR is up over 30% in the last three months.  The credit worthiness of European banks is being question by their very own peer group.  That’s not good for liquidity in the Euro zone.”


As MACRO trends continue to point us in the direction of another recession, the implications of worse-than-expected ballooning federal deficits will bring the issues of U.S. solvency and U.S. dollar soundness front and center.  The Hedgeye Macro team will address this topic on a conference call in the coming weeks.


For now, on center stage is the tug of war between the strength of corporate earnings and the weakness in the economic numbers, and the battle is leaning toward MACRO trends.  So far this earnings season, 32% of the companies that have reported have missed on revenue expectations (60% of the companies that reported yesterday missed on the revenue line).  This compares to 32% for all of 1Q10. 


Relative to earnings expectations, only 20% of the companies that have reported have missed.  Top-line trends, however, are more indicative of real consumer demand and the sustainability of earnings trends as companies cannot cut costs forever.  Relative to current guidance, the storytelling continues. 


If we assume that the best of the best typically report first, the balance of the earnings season will not be supportive of equity prices.


I don’t claim to be a German historian or that the USA is going to feel anything like the pain Germany felt between 1.  At Hedgeye Risk management we like to keep history is perspective and our eyes open every morning to the realities of the day ahead.   


Function in disaster; finish in style


Howard Penney


Weimar Republic - mark

Fire In the Hole! European Libor Exploding to the Upside

Conclusion: European LIBOR is signaling that the European banks stress tests to be released this Friday may have some negative surprises.


While we have transitioned our short eyes to the U.S. dollar and the U.S. markets, European liquidity issues remain an important topic in global risk managment.  Below we have highlighted a chart of three month Euro LIBOR, which is the rate at which European banks will lend to each other in Euros.  Most market participants view it as a measure of fear and counter party risk between European banks, and rightfully so.


As we can see in the chart below, despite all the rhetoric from government officials about banks passing stress tests and the such, the banks themselves are voting.  And with three month Euro LIBOR up over 30% in the last three months, and projecting upwards and to the right, the statement is fairly obvious.  The credit worthiness of European banks is being question by their very own peer group.  That’s not good for liquidity in the Eurozone.


A few weeks ago we highlighted the allocation by banks to the ECB deposit facility as it was reaching record levels.  Our point, then, was that rather than lending to other banks overnight, many European banks had opted to store Euros with the ECB.  That facility has fallen from its peak of $384 billion to $58 billion Euro.


Typically this decline would be perceived as positive in terms of liquidity within the system, but taken in conjunction with intra bank lending rates increasing it actually suggests just the opposite.  In combination, there is less money in the intra bank system and it is being lent at a higher rate.  So less money, and a higher cost.


I asked our Financials Sector Josh Steiner if there were any financials specific information that we should be thinking about when considering the above data points.  His response was: “It all goes back to the sovereign debt. Euribor rising is because banks are nervous, and if banks are nervous it’s because of counterparty risk which itself is a derivative of sovereign risk. All interconnected.”


In the mining industry fire in the hole is yelled out prior to an explosion in a confined space.  Even though Europe isn’t a confined space, Hedgeye is officially yelling, “Fire In The Hole”, ahead of the results of the stress tests of European banks to be released Friday.


Daryl G. Jones

Managing DIrector


Fire In the Hole! European Libor Exploding to the Upside - EUR LIBOR

Hungary for Assistance

Position: Long British Pound via FXB


Hungary is flashing a clear negative divergence across numerous metrics today on the heels of a bearish IMF statement over the weekend. Here is the set-up behind the numbers:


The IMF concluded in its review of Hungary’s $25 Billion emergency bailout that “a range of issues remain open” and that the country is not doing enough to slash spending or make long-term reforms to its economy. If you’ve followed Hungary this report comes as nothing new: the government has struggled over the last five years to manage its budget imbalances, forcing the IMF to take the lion’s share of a $25 Billion loan in Oct. 2008 (with the EU and World Bank contributing ~ $8.1 Billion and $1.3 Billion, respectively) to support Hungary’s outstanding debt.


While skeptics may conclude that Hungary has no intent to issue “real” fiscal reform, but rather will pander to whatever the IMF wants to see, we’ll wait until this Thursday, when the government meets to vote on its next economic plan, before concluding further. However, it’s worth noting that going into the vote Hungary’s ruling Fidesz party has municipal elections on October 3rd and loud protests against austerity measures in mind.


Market Sentiment


The Hungarian market reacted decidedly negatively to the IMF’s statements, with investors worried that the country could jeopardize its access to a €5.7 Billion IMF loan tranche earmarked for this year. 


Here’s what the market said:

  • Hungary’s equity market (BUX) fell -2.3% today (1st chart below). [You’ll note that our read-through on the European bank stress tests (which will be released this Friday) is that these banks (91 in total) are largely set up to NOT fail, yet should negative issues arise we’d expect the EU to write checks quickly to fund the gap.]
  • The Hungarian Forint versus the EUR took a dive into the news (2nd chart below).
  • The country’s sovereign CDS rose materially (3rd chart below).



One concern with a weakening Forint versus the EUR or Swiss Franc is that many loans extended in Hungary over the last five years were denominated in lower yielding Euros and Francs. Clearly a depreciating Forint increases risk of default as debtors are squeezed further with repayments. 


The IMF also took issue with the country’s two-year levy on banks, aimed at raising over $900 Million, citing that “a significant negative impact on the country’s investment climate and economic growth.”  Also, we note the worry for foreign banks in Hungary, in particular the Austrian lenders Raiffeisen and Erste, as relative loser under these parameters.


Hungary gets another chance to prove its fiscal discipline when the IMF meets again in September. Between now and then we could see an uptick in volatility in Hungary and related Western and Eastern European markets. Despite the Euro’s recent gain above $1.29, clearly Europe’s sovereign debt default fears are not in the rear-view window!


Matthew Hedrick



Hungary for Assistance - hung1


Hungary for Assistance - hung2


Hungary for Assistance - hung3

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.


Macau market growth has been outstanding but MGM continues to underperform. What will this mean for the timing of the MGM Macau IPO? 



We think MGM may have to delay its planned IPO.  As of MGM's last conference call, management had expected to price the IPO in late Q3/early Q4.  While the timing may seem good given that growth in the Macau market has been off the charts and investor sentiment is pretty positive, MGM Macau has been a laggard.  See the market share chart below.  The trend in MGM's market share doesn't look good on its own given the property's size and lately, has been significantly below its share of table games.  Fair share is not where it should be. 


MGM IPO, WHEN? - mgm3


MGM needs to sell this deal on a future level of EBITDA significantly higher than the trailing four quarters tally of $205 million. One way to do that would be to increase market share.  We believe they have taken a step in that direction with the hiring of Mr. Kwong to run the VIP business.  As we pointed out last week in our note "MGM LOOKING TO BOOST VIP SHARE, " Mr. Kwong is a top line focused operator with significant junket connections.  He should bring over a big book of business.   He's not afraid of sacrificing the bottom line to help the top line but MGM may not be interested in near-term profits.  The problem is that Kwong doesn't start until September and will need a few months to prove his mettle. 


The second timing issue MGM faces concerns Grant Bowie.  His contract runs out this year and we're not sure Pansy Ho nor MGM may be keen to renew the contract.  Thus, the new GM would need time to implement his plan and show results.  These hurdles may push the timing at least into Q1 2011, maybe later.


Through July 18th, Macau table revenues were HK$8.58 billion, implying a +60% month.



Macau is booming again, thanks in part to the end of the World Cup.  Through July 18th, Macau table revenues were HK$8.58 billion.  That number implies approximately HK$14.5 billion in table revenues for the whole month of July.  If we add in expected slot revenue HK$0.7 billion, we are now projecting total July Macau gaming revenues of HK$15.2 billion, up 64% from July 2009.  While not exactly a tough comparison – July 2009 was up 3% YoY – this is the first of many positive monthly comparisons Macau will face.  August 2009 climbed 17% and September was +54%, so the comparisons do get increasingly more difficult.


Here are the table revenue market shares.  MPEL and Galaxy look like the big winners in July relative to where they were in June and all of Q2.  Encore continues to keep Wynn’s market share above 17%.  LVS looks like the sequential loser with its share falling to under 19%.  If LVS’s share holds through the rest of the month, it would represent an all-time post-Venetian low for the company.  MGM is having an awful July in terms of market share.  Mr. Kwong is needed now more than ever and September can’t come fast enough for MGM.



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.”  <wwd.com/business-news>

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%). <licensemag.com>

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%. <brc.org.uk>

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.  <wwd.com/business-news>

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. <wwd.com/retail-news>

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. <sportsonesource.com>

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 walmart.com 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. <wwd.com/retail-news>

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 (www.SportsAuthority.com) and other related brand sites. <sportsonesource.com>

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. <drapersonline.com>

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. <wwd.com/retail-news>

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. <internetretailer.com>

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.


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%