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Weekly Claims Volatility Has Become the Norm, But the Underlying Trend Remains Steadily Sideways

Initial claims fell by 11k last week (7k net of the revision). This comes on the heels of the prior week’s increase of 37k.  At 457k, the number reported today is right in line with the 450-470k range the series has occupied for all of 2010.  On a rolling basis, the improvement was 4.5k bringing the rolling total to 452k. Ultimately, initial claims need to be in the 375-400k range before unemployment meaningfully improves.






The table below shows the price performance of each Financial subsector over four durations. 





Below, we show the correlations between initial claims and each of the 30 Financial Subsectors. To reiterate, Credit Card and Payment Processing companies show the strongest correlations to initial claims, with R-squared values of .62 and .72 over the last year, respectively.  Surprisingly, some subsectors show a positive correlation coefficient to initial claims - i.e. Financials that go up as unemployment claims go up.  These names are concentrated in the Pacific Northwest Banks and Construction Banks, though these correlations are usually not very high.  


In the table below, we found the correlation and R-squared of each company with initial claims, then took the average for each subsector.  For composition of the subsectors, see Chart 5 below.




The following table shows the most highly correlated stocks (both positively and negatively correlated) with initial claims. Note that the top 15 negatively correlated stocks have a much stronger correlation on average than the top 15 positively correlated stocks - as you would expect, given that most of the Financial space is pro-cyclical. 




Astute investors will note that in some cases the R-squared doesn't seem to reconcile with the square of the correlation coefficient. This is a result of finding the correlation and then averaging. For example, Pacific Northwest Banks have an average correlation coefficient of .32 and an average R-squared of .52 (with CACB, CTBK, FTBK, and STSA strongly positively correlated and UMPQ strongly negatively correlated). The different directions have the effect of canceling out each other out when finding the average correlation coefficient, but do not cancel out when finding the average R-squared. 


As a reminder, May was the peak month of Census hiring, and it will remain a headwind through the September data as the Census continues to wind down.




Joshua Steiner, CFA


Allison Kaptur



As we look at today’s set up for the S&P 500, the range is 29 points or 1.4% (1,091) downside and 1.3% (1,120) upside.  Equity futures are trading above fair value more than making up for yesterday’s loss. 

Today will bring a slew of earnings releases and weekly jobless claims. 

  • Advance/Decline Line: -1086 (-726)
  • Volume: NYSE 1004 (-9.9%) - Volume is down DoD - yesterdays decline was on unconvincing volume.
  • Sector Performance: Every sector declined yesterday - 4 outperformed (RECOVERY/REFLATION trade underperforming - day 2)
  • Market Leading Stocks: Wyndham WW +8.0%, CB Richard Ell +7.5% and Eastman Kodak -15.2%, IGT -10.1%

Equity Sentiment:

  • VIX 24.25 (4.6%) - The VIX is broken on TRADE, but up for the last two days.
  • SPX Put/Call ratio - 1.99 up from 1.40 (low on 07/15/10 of 0.87)

Credit/Economic Market Look:

  • TED Spread - 32.3875 to 31.5519
  •  3-Month T-Bill Yield .14% to .15%
  • Yield Curve 2.3736 to 2.3843

Commodity/Growth Expectation:

  • CRB: 266.16 +0.64%
  • Oil: 76.99 -0.66% (down for 3 days)
  • Copper: 324.55 (1.22%) – looking to be up 8 of the last 9 days - trading above its TRADE line - BULLISH for growth expectations
  • Gold: 1,161 (0.09%) - Gold has decisively broken the Hedgeye intermediate term TREND line of support (1197); the long term TAIL of support -4.2% lower at 1115


  • EURO: 1.2997 (0.9%)  - Up 5 of the last 6 days - trading above the TRADE line
  • DOLLAR: 82.179 (-0.01%) - BEARISH formation

Overseas Markets:

  • ASIA - With the exception of China, most Asian markets declined today on soft economic figures from the US.
  • China on fire, closing up for the 8th out of the last 9 days, +0.55% on the Shanghai last night; still -19.1% YTD.
  • EUROPE - European markets are trading higher after a slow start as market participants digested a raft of corporate results and shook off mixed markets across Asia and disappointing US economic data. Pharmaceutical and telecom companies are amongst the leading gainers. Major indices trade just below session highs.
  • Eastern Europe surging - Russia up 1.7% and Ukraine up 1.2%.
  • Greece has finally traversed the Hedgeye TREND line of 1652; trading up +22% from the 6/7/10 bottom; monster squeeze.
  • LATIN AMERICA - Major indices are lower, with Venezuela and Brazil up 0.38% and 0.2%, respectively.
  • MIDDLE EAST - Mostly higher with the UAE trading down another 0.1% and Egypt up 1.4%. 


CRI: This Smells Punk

CRI wins the award for the most disappointing EPS report yet. Really…there’s not much on the positive side to pull out at all. Yeah, the company missed and guided down. But it’s the speed of and derivation from which things changed is the bigger callout for me.


Consider this…

1) Every division experienced sequential erosion in underlying top line trends.

2) The most pronounced was in CRI’s mass business. Though Mass is CRI’s lowest margin business, it is the highest ROI by a moonshot.  Revenue rolled in this space by about 1500bp, and CRI noted that it was almost entirely driven by loss in shelf space at Wal*Mart. So let me get this straight, WMT’s apparel business is in disarray, they fire their head of apparel, and simultaneously cut space from CRI. Perhaps unrelated, but I certainly wouldn’t want to be the head of the Mass business at Carter’s now.

3) Carter’s posted the sharpest sequential erosion in its trajectory on our SIGMA chart out of any company to report this EPS season. See chart below. The punchline there is that inventories are building relative to sales at the same time the company is about to go up against its biggest gross margin gains in years.

4) CRI’s guidance suggests an acceleration in top line throughout the remainder of 2010, yet 2H earnings better than 20%. Yeah, I know that labor, commodity and import costs are up. No escaping that. But do you think that just maybe they can slow down their growth a bit and gain control of their business? Instead they’re budgeting costs up 10% in 1H (enough?), and are banking on raising prices in certain areas to offset these costs. Do you want to bank on that? I don’t. Hey CRI, stop adding stores, and get the product org in order. Note to management: even big retailers in disarray rarely cut great product.

5) No one should forget that this company is operating at peak margins of around 13%.  Even during the years where CRI struggled leading into and out of its well-deserved management shake-up, it never got below a 9% margin. Then it raced up from there printing what I’d consider an unrealistic revenue flow through rate from wholesale restocking and commodity cost relief.

6) Also, remember that it’s ills last go around were based on the fact this has traditionally been the ultimate ‘baby basics’ play. The brand is extraordinarily defendable in that segment, but unfortunately, growth has been coming from playwear (competing with the Old Navy’s of the world), mass channels, and company retail – all of which are inherently more volatile that CRI’s core. Unfortunately, the company has not yet invested in the infrastructure needed to sustain the top line in those businesses when faced with anything other than a bullish consumer tape.  

7) The company guided to down gross margins in 1H next year – without further clarification or quantification. That’s fine, and in fact I would not expect the company to know what Gross Margins will be given factors above. But a warning to those financial modelers out there…don’t think ‘down’ in terms of  40, 80, or even 100bp. This could be much more.  Just ask Li&Fung.

8) Bottom line: yes, 2011 should be a down year. If the consensus does not come out with such numbers after the conf call, then despite trading down today, this name is likely to have additional downside.



CRI: This Smells Punk - CRI 7 10 black



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The Macau Metro Monitor, July 29th, 2010


Intercity Group, a South Korean real-estate developer, is planning to build Bellus Angokor Resort & City, a $400 million integrated resort and casino in Cambodia, to target Chinese high-rollers from Macau and Singapore.  Harrah's and MGM are potential investors of the project.


James Cho, vice-president of Intercity Group, told Reuters that the resort will be in Siem Reap province,195 miles northwest of the capital Phnom Penh, which attracts over a million tourists a year to its famed Angkor temples.  Construction of the Water Park complex, with 3 hotels, a gaming centre, shopping and convention centres and 3 golf courses (including 18-hole course), will start in October and it should open in early 2012.   "They're (Chinese) visiting Singapore, they're visiting Southeast Asia, and we just think that right now it's a very good time, it's the right time. Asian gaming is hitting Cambodia right now...There is no visa restriction like they have in Macau," Cho added.


Cambodia attracted 2.2 million tourists last year, with about 580,000 flying directly into Siem Reap, according to government statistics.  The Cambodian government earned $17MM in 2009 from its 29 casinos.



Starting next month, Korea will loosen travel restriction for Mainland Chinese visitors.  Korea hopes to attract >3 million annual visitors by 2012.  According to the Director of Travel & Tourism Association in Macau, this change in scheme will in the in short term potentially reduce the number of mainland visitors traveling to Macau, but from a long term perspective, it should not cause a major impact since Korea and Macau are different markets.



The bylaw that states that companies “should keep the minimum number of local workers imposed upon the [imported labour] hiring authorization” will come into effect on Sunday, the Human Resources Office (GRH) said.  According to the bylaw, if any local worker were to leave, another one should be hired within two weeks. If that’s not possible, the company should ask GRH for an extension of the deadline, within five days. After that, the authorities have 15 days as well to decide on whether the extension is justified or not.

R3: Putting Basis Points Aside



With earnings season picking up over the past couple of days, there are some noteworthy callouts that may have slipped by as basis points become a primary focus:

  • With the benefit of substantial increases in toning shoes sold and comparisons against a very difficult quarter, Skechers domestics ASP’s increased by 31.5% in 2Q.  Even more impressive were the unit sales, which increased by 50%!
  • With Wal-Mart’s apparel program in-flux, we’ve seen some negative repercussions from the discount retailer’s lack of a clear apparel strategy over the past few days and it’s having an direct impact on branded manufacturers.  Both Carters and Jones New York (via its LEI brand) are suffering from floor space reductions at the Wal-Mart.  On the flip side, Iconix noted that Op and Danskin were performing well.  The bottom line here is that there are no sacred cows at Wal-Mart.  With new management coming in and substantial pressure to improve apparel profits/sales, there are sure to be meaningful changes beyond what we are seeing at the moment.
  • SuperValu noted that for the first time in ten quarters, trade-down was essentially flat in the quarter.  On a year over year basis, the trade-down impact actually improved by 100 bps from 1Q last year.  On the same note, management indicated that EBT and coupon usage remain at record high levels.
  • Iconix noted that it’s Fieldcrest home business with Target was down in the quarter, but that plans are underway to revamp the brand’s positioning.  Target is working to elevate Fieldcrest to represent the luxury/premium price point within the discounters home furnishings offering.
  • Office Depot expects back to school to be very competitive this year. As a result, the company is adding in incremental direct mail pieces and media to drive market share gains.  The company expects to be on TV and radio for the upcoming season, which it has not done for the past few years.
  • In the first half of 2010, free-standing insert activity increased by 10.1% based on coupons dropped, the largest increase ever recorded since an 8% gain in 2004.  More than $234 billion in consumer incentives were delivered via FSI coupons in Sunday newspapers, up 17.8% from the same period in 2009.  Average face value of coupons also reached record highs, coming in at $1.51, up 7.1% year over year.
  • Jones New York noted that it expects to be able offset higher costs in 2011 by offering improved content and quality in its fashion product.  At the same time management was cautious on the opportunities for gross margins to move higher next year given the inflationary pressures.  They went on to suggest they are hoping to hold gross margins flat.
  • Timberland noted that it has booked 90 appointments with buyers and retailers at this year’s Outdoor Retailer show next week.  This is double the amount of meetings they conducted last year. 



Levi at Brooks Brothers - A new denim collaboration between Levi’s and Brooks Brothers will be introduced today at all Brooks Bros. stores and the retailer’s e-commerce site. Co-branded as Levi Strauss for Brooks Brothers, the $148 designs come in three fits and six washes for men, with all product made in the U.S. “There are millions of guys out there who wear our classic Brooks Brothers button-down oxford shirt with Levi’s jeans, so we thought there would be great synergy in offering an exclusive Levi’s product in our stores,” said Lou Amendola, chief merchandising officer at Brooks Bros. The idea for the project originated with Brooks Bros. chairman and chief executive officer Claudio del Vecchio, added Amendola. The jeans will be merchandised along with Brooks Bros.’ own branded Supima cotton jeans, which retail for $98.50. The Levi’s product will be available in all 114 traditional Brooks Bros. stores, but not the retailer’s 91 factory outlet units. The partnership is expected to be open-ended, depending on consumer reaction. Brooks Bros. throughout much of its history carried outside brands, such as Lacoste polos from the Thirties through the Sixties, noted Amendola. Currently, the 192-year-old retailer also carries the Black Fleece label designed by Thom Browne, a co-branded luggage line from Hartmann, footwear from Peal & Co. and a children’s wear collection under the Fleece label designed by Nikki Kule. <www.wwd.com>

Hedgeye Retail’s Take:  Americana continues to be at the forefront of men’s fashion although we caution that this trend is not new.  This Fall will mark the third year in a row in which American heritage brands have collaborated with each other or have been resurrected in an effort to accentuate their “Made in the USA” lineage.


Macy’s Courting Young Men - For back-to-school, the retailer will launch Slade Wilder, a young men’s brand targeted at high school and college-age shoppers. The brand, whose icon is a snorting, mud-pawing wild boar, is hitting stores this week and will roll out to a total of 656 doors — anywhere that has a young men’s department — next month. The top 195 stores will offer an expanded assortment in a branded shop environment. Slade Wilder, which will sit next to Macy’s American Rag in the young men’s department, is inspired by athletics and designed to appeal to a guy who is shopping for himself. It will consist of screen-printed or appliqué T-shirts, basketball shorts, polo shirts, wovens, hoodies, track pants and jeans and will retail from $14.99 to $29.99. The idea for the label came from the late Kevin Morrissey, Macy’s head of men’s wear, who saw a void in the assortment for a casual, athletic brand that was “not branded like a Nike or Adidas.” <www.wwd.com>

Hedgeye Retail’s Take:  So in other words, Macy’s is launching a private label athletic brand with a wild boar brand logo.  Of all the categories, athletic has never been a strong point for the anchor department store.


Chinese Infidelity Driving Luxury Sales? - Luxury brands better get to know the Chinese words er nai and xiao san. Those phrases mean mistress and third girlfriend, respectively, and are whispered on an almost daily basis by well-to-do Chinese. “With some fashion brands, we think that almost half of the sales are for mistresses,” said Rupert Hoogewerf, publisher and head researcher of the Huran Report, China’s rich list. “But this is difficult to ascertain.” Equally difficult is defining exactly who is the consumer driving China’s supercharged luxury consumption since specifics are so hard to come by. The superrich are another significant category of shoppers. Mainland China has 55,000 individuals with net assets of more than 100 million yuan, or $14.7 million, according to the Hurun Report. “This higher-wealth group tends to be slightly older men, age 44, and over 15 percent of these men live in Beijing. They have their own company, but have made their money from property and investments,” said Hoogewerf. Widening the net, there are 875,000 Chinese millionaires with personal assets of more than 10 million yuan, or $1.47 million. This figure includes the 55,000 superrich individuals mentioned earlier.  “A typical Chinese millionaire is a 40-year-old man who has made his money in property and investments. He owns four luxury watches, and owns at least three houses, the value of which have doubled in the last three years, and makes about four overseas trips a year, one of which is purely for leisure,” Hoogewerf said.  <wwd.com>

Hedgeye Retail’s Take:  This certainly presents a marketing conundrum.  We’re guessing Facebook and Twitter are not the answer here.


K-Swiss Acquires Youth Brand - The company announced today it had acquired mixed martial arts apparel brand Form Athletics, and launched a subsidiary called K-Swiss Orange County. Mark Miller, founder and president of Form, will continue to lead the brand, as well as the new business unit, which will specifically design products for younger consumers. “I have a dual role,” Miller said. “I will be president of Form, and I’ll also be president of K-Swiss Orange County. It’s the youth culture division of K-Swiss. It will be focused on building a product line and creating a product line around youth culture, skate and action sports.”  While office space hasn’t yet been secured, Miller — who has also served as SVP and GM at DC Shoes — said the division would likely be located in South Orange County, Calif., and staffed with 10 to 15 designers and marketers. For K-Swiss EVP David Nichols, being located in Orange County is essential to tapping into youth trends. “We want to be as authentic as possible,” he said. “The K-Swiss Westlake Village office is a great place to develop running shoes because of the surrounding hills and trails. Orange County is a great place to connect with youth culture and skate.” <www.wwd.com>

Hedgeye Retail’s Take:  While KSWS’ track record of making successful acquisitions is mixed (Palladium does appear to be good move, Royal Elastics not so), this one makes sense.  It’s no secret that KSWS has been struggling for growth and action sports has been on their radar for a while.  It’s good to see them exploring a new brand for this effort, after going down the path of initially using the K-Swiss brand to break into skate.


Adi Takes to the Outdoors - Effective fall 2011, adidas will enter the US Outdoor market with a newly developed range of footwear, apparel and accessories, including the TERREX concept, which debuted in Europe in 2009 to great reviews. The collection will be available in the US at selected Outdoor specialty retailers and in adidas own Sport Performance stores starting fall 2011. Long-time adidas partner Agron Inc. will be the official and exclusive distributor for adidas outdoor products in the US. Retail partners in the US will be able to preview the adidas Outdoor Fall/Winter 2011 collections at the January 2011 Outdoor Retailer Show in Salt Lake City, Utah. Adidas has a long history in innovative outdoor products with products such as the ‘Super Trekking’, the first light trekking shoe, being worn by climbing legend Reinhold Messner for his first Everest ascent without oxygen support in 1978. The tradition of adidas founder Adi Dassler, who worked individually with athletes to make them better, continues today. Adidas Outdoor has teamed up with climbing legends Reinhold Messner and the Huber Brothers, to work with them on product development. The Huber Brothers are ambassadors for the TERREX collection and have worn the product on recent expeditions to Antarctica and Pakistan. <www.sportsonesource.com>

Hedgeye Retail’s Take:  How long before Easy Tones cross with TERREX?


HSN Receives New e-Commerce Patents - TV and web retailer HSN Inc. has been awarded a patent for its technology that lets consumers shop with their TV remotes and another patent related to making purchases from online video, the retailer said today. "This reinforces our position as a revolutionary force in television and retail as we continue to bring exciting innovations to our customers that enable them to shop whenever and however they choose,” says John McDevitt, vice president of advanced services. He adds that the patents announced today are the first HSN has received for e-commerce technology. <www.internetretailer.com/>

Hedgeye Retail’s Take:  Any patent that keeps consumers on their couch longer is certainly newsworthy.  With market increasingly focused on mobile commerce, let’s not forget there are still opportunities for immobile commerce.


Pakistan Export Value Drops, Average Prices Reduced - Pakistan’s leather products dropped by 19% in terms of export value, with the average unit price going down by around 11% in the 2010 fiscal year. Exports of leather goods went down by 18.7% to $452.63 million in 2009-10. The average unit price of leather garments reduced from $37 per unit in 2009 to $33 per unit this year. Pakistan has been selling its garments at a price 34% lower than the world average of $50.  <fashionnetasia.com>

Hedgeye Retail’s Take:  A rare example of a deflationary trend, which at this point may be in the rear-view. 


Miscellaneous Tariff Bill Passes - The U.S. Senate late Tuesday passed the U.S. Manufacturing Enhancement Act of 2010, better known as the miscellaneous tariff bill, or MTB (H.R. 4380). The MTB extend duty suspensions on several outdoor products, including waterproof breathable footwear, ski and snowboard equipment and footwear, and bicycle parts and accessories. <sportsonesource.com>

Hedgeye Retail’s Take:  A positive on the cost side for sporting goods, with duty suspensions extended.  This was largely expected.


WMT Will Have to Pay More than Minimum Wage to Open More Chicago Stores - Wal-Mart Stores Inc.’s quest to open a third store in Chicago may hinge on whether the retailer is promising to pay workers at least 50 cents more than the Illinois minimum wage.  The size of paychecks was at the center of the city council’s vote last month to approve a second store. Aldermen and the United Food and Commercial Workers International Union said the retailer committed to $8.75 an hour. Steve Restivo, a Wal-Mart spokesman, wouldn’t confirm a starting wage as the retailer pushes to build several dozen Chicago stores.  <bloomberg.com/news>

Hedgeye Retail’s Take:  With communities in Chicago turning the tides on Wal-Mart acceptance (recall they resisted WMT for years), it’s unlikely that a $0.50/hour wage issue will derail WMT’s efforts to open multiple units within the Windy City.


GES To Open NYC Flagship, Open More Accessory Stores, Create Home Collection - Guess has a lot on its plate these days. In December, the brand will open its largest U.S. store, a two-level, 13,000-square-foot flagship at 575 Fifth Ave., on the corner of 47th Street. In addition, Guess plans to double the number of accessories-only stores to 450 worldwide in three years and round out its list of product categories. A home collection could complete the brand, Marciano said. Once they find the right partner, they will do a partnership or licensing agreement. <wwd.com/retail-news>

Hedgeye Retail’s Take:  Guess home, really?  Leopard prints are on their way to a bedroom near you-


World Cup Study Shows Adidas's International Brand Awareness Unchanged at 2nd to Coke - Adidas was the second most widely-named brand as a World Cup sponsor, both before and after the event, according to a new study with Survey Sampling International's (SSI). Coca Cola was first. <sportsonesource.com>

Hedgeye Retail’s Take:  So was the sponsorship worth it?  The real question will be answered when the next study comes out months after the World Cup fades into the past.


Tech Shoppers Research Products Online Before Buying in Store - Two-thirds of consumer electronic s and computer shoppers start their research on the web, but purchases are split evenly between online and stores, a new study finds. The research, consisting of an online focus group and a poll this spring of nearly 1,200 consumer electronics and computer shoppers, also finds laptops, notebook computers and televisions are the top products researched or purchased online.  <internetretailer.com>

Hedgeye Retail’s Take:  Nothing surprising here given that Best Buy alone is seeing about 40% of online purchases picked up by the buyer in-store.  Multi-channel retailing continues to take the lead on convenience, offering far more options for consumers than online-only competitors.


Sears Offers Dorm Room Collection - In anticipation of the upcoming school year, Sears Holdings has launched a dorm décor line and digital platform for college-bound students. Coexist by Cannon, a dorm décor range, is exclusively hitting both Sears and Kmart stores now. The urban-inspired collection includes bedding, decorative elements and dorm essentials. Meanwhile, Sears Holdings has greenlit a Facebook page called Sears Campus Connection, where college-bound students can create wish lists that work like a wedding registry, find their roommates, chat about decorating ideas and more. <licensemag.com>

Hedgeye Retail’s Take:  Newsflash: Target started the “dorm” décor trend about 10 years ago!  Welcome to 2010 K-Mart and Sears.




PE news and earnings provided a boost to a few stocks yesterday on a poor day, overall, for restaurant stocks.


CPKI was up 9.6% on surging volume at yesterday’s close.  As the Wall Street Journal reported yesterday, private equity firm American Securities Capital Partners is in advanced talks to by the publicly-traded chain of 260 restaurants and is lining up debt financing, the Post reported.  Unless the number is low, which I doubt, the stock is fairly valued to overvalued.  At 7.1X EV/EBITDA, the stock is trading at a premium to the peer group at 6.6x. 


Anything can happen but, I think the bankers will struggle to get the deal done north of $18.50.  In addition, the laundry-list of issues any potential buyer of CPKI needs to deal with is long. 


MSSR seems like another potential, more reasonable, candidate.  At 4.9x EV/EBITDA, there is 21% upside to where its peers are trading.



TALES OF THE TAPE - stock 728



Howard Penney

Managing Director

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 80.51%
  • SHORT SIGNALS 78.32%