Tailwind Into The Midterms

Conclusion:  It appears increasingly likely that Republicans will gain some political control in the midterms, which should put the Bush Tax cuts squarely in play for an extension.  This would be positive for equity valuations in the short term.


I’m not sure even anyone has ever said this, but I will for the first time, polls don’t lie, people do.  Now, obviously, polls can lie, but in the aggregate they should tell us the story if they are implemented in a statistically relevant manner.  For the sake of argument, we will assume that the polls in the Real Clear Politics aggregate are accurate assessments of the political situation in the United States.


As it relates to the 2010 midterms, the polls suggest that the House Democrats will win 202 seats, and Republicans will win 201 seats, and that there are currently 32 toss-up seats.  While in the Senate, the polls suggest that 49 seats will go Democrat, 43 seats will go Republican and that there are currently 8 toss ups.  Now, obviously, since the full House is up for re-election every two years, it more accurately reflects the political wind of the country.  Currently, the political wind is blowing sharply to the right.  So much so that if the election were held today, the Republicans would have a real shot at regaining the House.


It is likely that the potential for Republican share gains only accelerates into the midterms given President Obama’s approval rating.  According to the Real Clear Politics aggregate for President Obama Approval, the President negative spread, so the difference between the positive approval rating and the negative approval rating, is -4.5.  The math behind this is a 45.1 approval rating and a 49.6 disapproval rating.  This negative differential is the lowest of President Obama’s first term, and is highlighted in the chart below.


Tailwind Into The Midterms - 1


In our morning meeting, Keith posed a fair question to me, which was who is the Republican front runner for the Presidency in 2012, and the answer was, I don’t know.  While President Obama is currently struggling with his approval rating and the Republicans would win in a generic head to head to poll in 2012 by 6.0 points, there doesn’t appear to be a Republican candidate that, as of yet, has stepped into the forefront.  With heightened concern about the debt, it seems likely that a practical and fiscally tested candidate might do the trick, but as of yet we aren’t sure who that person is going to be.


Between now and the 2012 Presidential election, President Obama’s approval rating and potential loss in a generic head to head ballot is most relevant for the upcoming midterms.  Those candidates in tight races will likely not want to be seen as associating with an unpopular President, but as a result won’t have the President’s bully pulpit and funding machine to utilize either.  Regardless, one point is becoming increasingly clear, the Republicans have a tailwind heading into the midterms.


Interestingly, a key implication of the Republicans taking back a combination of either the House (likely) or Senate (less likely) is that an extension of the Bush tax cuts could be firmly in play.  In fact, Paul Krugman, even noted this today in his New York Times column when he wrote:


“But Washington is providing only a trickle of help, and even that grudgingly. We must place priority on reducing the deficit, say Republicans and “centrist” Democrats. And then, virtually in the next breath, they declare that we must preserve tax cuts for the very affluent, at a budget cost of $700 billion over the next decade?”


As it relates to our portfolios, the two key components of the Bush Tax cuts that are relevant are the capital gains tax and the tax on dividends.  In a complete roll back of the Bush tax cuts, these taxes would go from 15% to 39.6% and the capital gains tax would go from 15% to 20%.  Inherently this policy has a direct impact on stock valuations, specifically related to high dividend paying stocks.  To the extent that these tax cuts are preserved, it should be positive in the short term for equity valuations.


Of course the debate and discussion over tax policy is a long and nuanced one, which would take up more wind and paper than this simple research note has allotted to it, but we just wanted to highlight that increasingly it seems that with the Republicans likely to gain political power in the midterms there will be an impact on tax policy, which may be marginally positive for stocks in the short term.


Of course, perhaps the most compelling evidence to keeping the tax cuts in place is that former Fed Chairman Greenspan recently came out against them when he said in a New York Times phone interview on August 6th:


“I’m in favor of tax cuts, but not with borrowed money. Our choices right now are not between good and better; they’re between bad and worse. The problem we now face is the most extraordinary financial crisis that I have ever seen or read about.”


Indeed, Mr. Maestro.


Daryl Jones

Managing Director


August Macau table revs were HK$4.0b through the 8th which projects out to a 40%+ month. Wynn and MPEL continue to move in opposite directions.



We have preliminary August numbers through the 8th and they look strong, although down sequentially.  Total table revenues were HK$4.0 billion which projects out to about HK$14.7-14.8 billion for the month, after considering that the first 8 days contained 2 Sundays.  While 40%+ YoY growth is nothing to sneer about, sequential growth is slowing, owing primarily to tougher comps.  Table revenues in August of 2009 were up 17% versus +3% in June and -17% in May 2009.


Even though the data covers only 8 days, the market share shifts are interesting.  The shifts in table revenue share seen in July seem to have accelerated in August.  Wynn fell to 11.3% thus far in August from 14.6% in July, which was already down significantly from the May peak of 17.2%.  No doubt most of this is hold related.  However, the story of Encore not being additive may begin to gain traction which could be bad for the stock, particularly given the valuation and positive sentiment/momentum already in the stock. 


On the other side, MPEL's table share moved up to 18.3% from 14.6% and 13.1% in July and June, respectively.  Unlike WYNN, MPEL shares suffer from poor sentiment - "these guys can't get their act together" - and a low relative valuation.  The perception that persistent bad hold is a permanent phenomenon at CoD/Altira hasn't helped the valuation.  A couple of months of monthly market share gains should.


Share trends for LVS, SJM, MGM, and Galaxy remained relatively consistent with July.  Here is the detail:



R3: Shoe(less)


August 09, 2010





With most eyes (and feet) still firmly focused on the toning trend, it may be time to begin to pay attention to the latest product innovation to hit the athletic footwear marketplace.  Barefoot running.  While Vibram created the first barefoot product in 2005, the popularity of the goofy looking Five Finger foot coverings is building.  Importantly, “barefoot” or “minimalist” footwear is becoming more mainstream with several brands launching products at the Outdoor Retailer tradeshow last week. Keep in mind, Christopher McDougall’s “Born to Run” book highlighting the benefits of running barefoot launched in May of 2009. With the book in the top 100 of Amazon’s bestsellers list since its launch and still #8 on the top 10 list, it’s fair to say there is considerable interest in merits of this concept. While it is still very early in terms of brand proliferation, it’s likely that we begin to see these shoes showing up in chain stores, after initially being distributed via specialty stores and independents. 


Interestingly, “less is more” certainly holds true here with pricing.  Most of the shoes are commanding premium pricing, hovering around the $100 price point.  While we haven’t had a chance to deconstruct the shoes themselves, we’re pretty sure the margin profile of a shoe designed to contain the minimum amount of material and sewn parts is one of the more profitable shoes on the shelf.  At this point it’s premature to make too big of a deal about this trend, but we do believe that this is further support for the athletic footwear cycle.  Innovation is key to the longevity and pricing power of the category, and this is yet another example of how something as boring/tired as “sneakers” continues to be reinvented. 


R3: Shoe(less) - 1





- Keep an eye on recently introduced legislation aimed at protecting original fashion designs.  The bill introduced by Senator Chuck Schumer, called the Innovative Design Protection and Piracy Prevention Act, is designed to provide limited intellectual property protection to the most original design.  Similar legislation has been introduced over the past four years, but this effort seems to have more support, including backing from the CFDA and AAFA.


- As retailers work to embrace and develop mobile commerce as an additional source of revenue and marketing reach, China has surpassed the US in mobile internet usage.  According to Nielsen, 38% of mobile subscribers access the internet on a mobile device compared to 27% in the US.   Total mobile subscribers top 750 million in China.


- Expect the buzz surrounding Coach’s latest luxury effort to reach new heights as the Reed Krakoff brand opens its flagship store on August 19th.  The Madison Avenue location is still under plywood wraps.





Apparel Retailers Increase Political Contributions for Democrats - In the overall retail category, which includes a broader array of PACs, including apparel retailers, home builders, electronics and drug stores, Republicans have still outpaced Democrats in contributions, but the gap has tightened. Republicans received 52 percent of a total of $3.5 million in contributions in this cycle, while Democrats received 48 percent, according to the center. The split was 55 percent Republican and 44 percent Democrat in the last cycle, so contributions to Democrats have increased proportionally so far. Wal-Mart’s PAC, by far the largest in the industry, has given $460,500 (54%) to Democratic candidates in the run-up to the Nov. 2 congressional elections — when all of the House’s and a third of the Senate’s seats are up for grabs — compared with $390,550 (45%) to Republican candidates, according to the Center for Responsive Politics. During the last congressional election cycle, in 2007-2008, Wal-Mart’s PAC gave more to Republicans ($655,000) than to Democrats ($573,700). <>

Hedgeye Retail’s Take:  Despite the slight shift towards the Democrats, it’s more interesting to note that one of the country’s largest industries (in terms of employment) only spends a paltry $3.5 million in contributions.  Perhaps it’s the lobbyists who are seeing all the cash. 


Intimate Apparel Under Cost Pressures - Although customers appear to be slowly returning, intimates vendors and retailers are under intensifying pressure to keep tight control of spending as costs for raw materials, labor and shipping escalate. Industry executives said they are taking a conservative approach to inventory for fall and holiday because of anxiety about a double-dip recession, chronic high unemployment and weakened consumer confidence. Vendors said they have been absorbing rising costs, for the most part, because retailers are coping with margins constrained by aggressive promotions. But executives speculated they will be forced to raise wholesale prices unless the situation improves in the next several months. The cost-saving initiatives undertaken by innerwear companies include: Committing orders six to 10 months in advance at a fixed price for unfinished greige goods; reinforcing partnerships with major contractors, factories, mills and fabric makers who can negotiate lower prices, package deals with major contractors that can command lower prices for fabrics, trims and laces; and designing with more embellishments such as pleats and ruffles that give a garment the look of added value while using less of an expensive fabric. <>

Hedgeye Retail’s Take:   Nothing new here but yet another inflationary trend. 


Barefoot and Lightweight Are the Trends from Outdoor Retailer Show - With high-profile collection launches from Merrell and New Balance — and related product from Teva, Terra Plana and Ecco, among others — outdoor players were optimistic the category will fuel sales. The explosion of minimal shoes and footwear designed with some barefoot elements has given running a boost. A few key shoes include: Vibram Five Fingers, Terra Plana, New Balance’s Minimus, and Merrell Barefoot Collection. <>

Hedgeye Retail’s Take:   Less is more, always.  Given the limited use of materials for “minimal shoes” we wonder if this might become one of the highest margin categories in all of athletic footwear.  Retail price points hover around $100 for shoes that are essentially rubber socks. 


Footwear Retailers Expanding Product Offerings, Holding More In-Store Events, and Ramping Marketing - Independent shoe retailers are tweaking product strategies for the fall with emphasis on existing brands, adding lines at lower price points, and expanding the number of labels they carry.  Other retailers are growing outside of footwear by selling clothes and accessories for the first time this fall in an effort to bring in more people. Retailers can’t discount much more, so it makes sense to bring in something else that might sell. Still, promotions will be a key strategy for many retailers this season whether through small discounts or packaged deals. <>

Hedgeye Retail’s Take:   This sounds like the usual scramble to compete with the bigger chains.  Unfortunately adding apparel into a footwear store is usually not the answer.  Look for apparel markdowns by the time the season is over.


Jimmy Choo May Be Up For Sale - Jimmy Choo Ltd., the luxury shoe brand and retail chain, may be sold for as much as 500 mm pounds ($797 million) by TowerBrook Capital Partners. TowerBrook in 2007 bought a majority stake in Jimmy Choo in a transaction that valued the company at 185 million pounds, the newspaper said. The retailer’s owners, who are considering their options, may decide instead to sell shares in the business in the next few years for 1 bn pounds.  <>

Hedgeye Retail’s Take:   If true, an impressive return in a very short time for the young luxury brand.  M&A still going strong, despite recent market jitters and an increasingly unclear outlook for the consumer (luxury included).


Tuscan-Based Luxury Retail Group Evanthe Buys Malo - According to industry sources, Evanthe, a general contractor that develops luxury stores for the likes of Louis Vuitton, Prada and Abercrombie & Fitch, bought Malo for between 8 mm and 10 mm euros. Besides the price, the administrators and the ministry were convinced by Evanthe’s industrial plan to grow and develop the brand. Malo is part of IT Holding, which has been in government-backed bankruptcy protection since February 2009.  <>

Hedgeye Retail’s Take:  Interesting ownership change of a fashion brand, now in the hands of the company that actually builds luxury stores.  Sounds like Malo may be coming to a high end mall or high street location soon as part of its revitalization efforts.


Footwear Trend: Camo - Camouflage prints are storming the girls’ market — and in this case, the idea is to stand out, not blend in. Whether in classic green and brown, or fun fashion colors such as pink and blue, the pattern punches up kids’ sneakers and sandals. <>

Hedgeye Retail’s Take:   Here’s a trend that never seems to go away.  Hopefully the shoes don’t get lost in the woods (or the closet).


Australian Tennis Brand Expands to US - Australian tennis brand Volley, a staple Down Under since 1939, will have its first broad launch in the U.S. market at the upcoming Project show this month. Created by Australian tennis legend Adrian Quist for on-court use, the simple canvas silhouettes have remained largely unchanged since their introduction. New York-based JM&S Projects LLC brought the line to the U.S. in an exclusive partnership with Steven Alan for this year, but is opening up the distribution for the unisex styles at the show. A $60 low-top will be available for immediate delivery; the $80 high-top will deliver Oct. 1. Both are targeted to sneaker boutiques and independents. <>

Hedgeye Retail’s Take:  Another “authentic” canvas shoes enters the competitive marketplace joining KSwiss, Jack Purcell, Converse, and Keds to name a few.


Jambu Enters Barefoot Market - New York-based Jambu is boarding the barefoot bandwagon with the Barefeet Designs collection for spring ’11. With three styles for for women, the $99 range features a memory foam footbed that the company compares to “walking on sand,” and lightweight and flexible outsoles made of a blend of natural and synthetic rubbers and rice husks. The collection will deliver Jan. 15 to independent retailers, e-tailers and sports- and outdoor-focused accounts.  <>

Hedgeye Retail’s Take:  How long before Skechers enters the barefoot market? Surely something has to be in the works.

Early Look

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The Macau Metro Monitor, August 9th, 2010



According to Chow Kam Fai, a member of the Legislative Assembly of Macau and CEO of Fisherman's Wharf, the two casinos in Singapore have a total of 800 gambling tables and monthly table revenues have already reached MOP 6 billion, compared with Macau's 4,800 gaming tables and monthly tables revenues of MOP 16 billion.  Chow concluded that Singapore's revenue per gaming table is several times higher than that of Macau's; thus, Macau should develop a unique, multi-cultural tourism strategy to attract more tourists, he added.  Chow believes Macau should not necessarily copy the model of Las Vegas.


Meanwhile, the plan for Fisherman’s Wharf to go public has failed.  Chow emphasized that Fisherman’s Wharf has various ways to obtain financing, and the company does not necessarily need to go public.  Fisherman’s Wharf is owned by Stanley Ho, Chow Kam-fai, and Lin Fenghe.



Construction of Macau’s light railway is scheduled for early 2011.  Completion of the first phase of the project would be in 2014.  According to MacauNews news agency, the first phase of the light railway will be 21 km long and have 21 stations, making it possible to carry 14,200 people per hour in each direction between Macau and Taipa island.



Drafted by representative Koga, chairman of The General Assembly of International Sightseeing Industry Development Diet Member Association, and Mihara, the advisor of the Assembly, the Casino Act consists of 68 articles and will be discussed at the normal assembly of Diet in 2011.  The Act states the expectation of two casino sites and up to 10 sites based on the performance of the first two sites.  The local government would draft site proposals and the operation of each facility would be executed by private entities which shall be licensed by the Casino Administration Organization to be established under the Cabinet Office.



Ramon Ang, vice chairman of food and beverage giant San Miguel, made a US$10 billion offer to Philippine President Benigno Aquino to take over Pagcor, the government's monopoly casino franchise.  According to Inquirer,  Ang says he intends to go into partnership with Malaysian magnates Robert Kuok, Ananda Krishnan and Francis Yeoh.


A spokesman for Pagcor, Jay Santiago, said privatization would not occur anytime soon.  "It is not as simple as it sounds. Eventually, there will be privatisation, but that is too far off," Santiago told AFP.  "(But) we agree that 10 billion dollars is a good benchmark. If and when we do go through that process, at least we know we will not be getting anything below 10 billion dollars."



Prime Minister Lee Hsien Loong said, "I understand Singaporeans' concerns about taking in so many foreign workers and immigrants…We will control the inflow, to ensure that it is not too fast, and not too large... We must make up for the shortage of Singaporean workers in our economy and the shortfall of babies in our population."  Loong reiterated that the economy will moderate in the 2nd half of 2010.  "Let us not get carried away. Risks remain in the world economy, especially in Europe and the U.S. The global financial system is not fully mended. Singapore is small and open. If the world economy turns bad, we will be buffeted," the prime minister said.



By being too fixated on numbers, Harrah's Gary Loveman, missed the opportunity in Macau.  But he still believes he can get back in action.  “There are two scarce resources in Macau,” he says, “land and gaming licenses. If you wish to have a resort in Macau, you need to have access to those two things. We have one of them [Caesars Golf Macau golf course, in Cotai].”


The intercity rail transit line start running by the end of October and officially effective by the end of this year.  However, some engineering problems in Zhuhai city have delayed construction progress.  It is uncertain when that construction will be completed.



As we look at today’s set up for the S&P 500, the range is 21 points or 0.7% (1,114) downside and 1.2% (1,135) upside.  

  • ADVANCE/DECLINE LINE: -233 (+227)
  • VOLUME: NYSE - 946.33 (+8.42% d/d);Very low volume (-17.6%) vs. 30-day average
  • SECTOR PERFORMANCE: Three sectors up XLP, XLV and XLU - The safety trade in a down tape
  • MARKET LEADING STOCKS: Perkinelmer +11.17%, Massey Energy +5.2% and Harmon (-11.7%), Washington Post (-7.6%)


  • VIX 21.74 (-1.6%) - The VIX is broken on TRADE
  • SPX PUT/CALL RATIO - 1.74 down from 2.67 (low on 07/15/10 of 0.87)


  • TED SPREAD - 26.2962 to 26.2388
  •  3-MONTH T-BILL YIELD .14%
  • YIELD CURVE - 2.3691 to 2.3088


  • CRB: 274.71 -1.07%
  • OIL: 80.70 -1.6% (down for 3 days last week)
  • COPPER: 334.30 -0.31% –trading above its TRADE line - BULLISH for growth expectations
  • GOLD: 1,205 (+0.80%)


  • EURO: 1.3280 (0.91%)  - Up 4 of the last 5 days last week - trading above the TRADE line
  • DOLLAR: 8.40 (-0.52%) - Down 4 of 5 days last week - Hedgeye Bearish formation


  • ASIA - Asian markets were mixed today after a down day in the USA on Friday - China up 0.53% (-18.45% YTD) and Japan down 0.72% (-9.23% YTD).  Japan economic data was a net negative  - slowing domestic demand and a shrinking current account surplus in June
  • EUROPE -European markets are trading higher reversing Friday's falls helped by Wall Street's paring of declines late in the session.  Mining and oil shares are amongst the leading gainers buoyed by commodity prices on the back of a generally weaker US dollar
  •  EASTERN EUROPE - Trading higher - Russia up 1.5% and Estonia down 1.2%
  • LATIN AMERICA - trading mixed Argentina and Brazil trading lower, while Venezuela trading higher by 1.36%
  • MIDDLE EAST/AFRICA - Mixed with Egypt up 0.88%
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













Watered Down Printers

“While it is true that you can fight fire with fire, it has never been suggested that you can fight water with water.”

-Richard Duncan


In a newsy weekend headline that was reminiscent of Paul Krugman’s infamous “PRINT LOTS OF MONEY” advice to the Bank of Japan in 1997, Barron’s Jonathan Laing told Americans that it’s “TIME TO PRINT, PRINT, PRINT.” Scary.


While it’s no longer shocking to see perma-bulls beg Bernanke to print moneys and debauch the long term value of America’s currency, it is becoming quite sad to watch. ‘Government Is Good’ monetarists have apparently learned nothing from history’s lessons.


On the topic of “quantitative easing”, rather than take the manic media’s word for it as they perpetuate a US stock market plea to perpetuate our traverse to economic perdition, I highly recommend reading Richard Duncan’s “The Dollar Crisis.” It was first published in 2003 and while it would be much more powerful if it was re-published alongside Reinhart & Rogoff’s “This Time Is Different” with today’s data, it’s still a critical analysis.


To save you some summer reading time, you can skip right to chapter 11. It’s titled Monetarism is Drowning and introduces some clever, non-consensus, thoughts like “Irrational Monetarism” that I think are well worth your time to consider. We are not going to solve America’s problems by printing more money and daring Americans to lever themselves up again to chase some yield. It’s time to get serious here.


The US Dollar has seen some serious destruction in the last 9 weeks. On the heels of another nasty unemployment report on Friday, the US Dollar closed down for the 9th consecutive week, taking its cumulative decline to -9.2% since the first week of June (we remain short the Dollar via the UUP).


At the same time, short term US Treasury yields closed out the week at their lowest weekly level EVER (0.51% UST 2-year yields) – and ever, as our Hedgeyes in New Haven like to say, is a very long time.


Don’t worry though, the CNBC and Barron’s stock market cheerleaders of a Destroyed Decade are still peddling you stories from their Watered Down Printers  into whatever media outlet they have left to drive an advertising dollar. In their perverse world, Dollar DOWN + Treasury Yields DOWN = a great case for stock market “valuation.” It’s a good thing we didn’t pay attention to them when this was happening in 2008.


Obviously no country has ever devalued its way to prosperity, and I don’t think Groupthink Inc. in Washington is teeing America up to set a new precedent time around either. I don’t believe in using the US stock market as a single-factor measurement tool for American progress. In an Early Look from a few weeks ago titled “Growth and Progress”, I introduced the following multi-factor scorecard for a sustainable American recovery:

  1. Strong Employment
  2. Strong Currency
  3. Strong Rates of Return

This isn’t political commentary. This is a pragmatic plan. If you’re a professional politicians who has been forwarded this email and you don’t like being called names or being called out – too bad. Quit whining, pointing fingers, and fear mongering and fix these 3 things instead of printing moneys. Then maybe we won’t continue to hit record all-time monthly highs in the number of Americans in line for food stamps (latest reading = 40.8 MILLION)…


The US stock market futures are up this morning, and they should be. After Friday’s unemployment report, US stocks rallied from their intraday lows to give the bulls hope. Hope might work for an immediate term TRADE, but for the intermediate term TREND, ignoring both the US currency and bond markets is for a buy-and-hope crowd far braver than we.


The SP500 has immediate term TRADE upside to 1135 and our Bear Market Macro line of resistance remains up at 1144. In the immediate term, the Watered Down Printers of money better hope and pray that “print, print, print” chant keeps the SP500 above 1114 support. Praying at least has a better track record than hoping water can fight water.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


Watered Down Printers - DDEL

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 80.43%
  • SHORT SIGNALS 78.35%