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R3: LOW: Gradual Fade (Expected)


August 16, 2010


The results out of LOW this morning were slightly off the mark, but not beyond the realm of expectations.  For now the gradual fade is visible. But as 2011 brings with it a likely double-dip in housing – this story could look very different.





One of the more obvious conclusions coming out of our conference call and Black Book on housing’s impact on retail related to the headwinds the home improvement retailers should face in 2011. Yes, I know. You don’t need to be a rocket scientist to make that conclusion.  With Lowe’s reporting this morning, we get a glimpse into where the DIY/Home Improvement sector is heading, and for now, it’s not that surprising.  The stock might be up on the number relative to expectations. But let’s face some facts… comps decelerated on a 1 and 2 year basis for the first time in 6-quarters, and earnings were down 10% on 3.7% sales growth. At face value, can someone rationally tell me why this is acceptable?


The one area that LOW had in its favor was inventory management. While still growing faster than sales (in 7 of the past 8 quarters), the sales/inventory ratio (see SIGMA chart) sequentially ticked up this quarter, which explains away the little squeeze in the stock today.


But the only real catalyst to get this name higher will be cash flow momentum – which is not there (especially vis/vis Home Depot), and/or a true underlying rebound in the housing market. As we gain confidence along with our Macro and Financials/Housing team that a double dip in 2011 is increasingly likely, can someone explain to me why LOW can’t have a down year AGAIN, and then AGAIN? Note: The Street has 12% EPS growth baked-in to this model for the next 24 months.


- Eric Levine, Director


R3: LOW: Gradual Fade (Expected) - 1





- JC Penney noted the early customer response to the company’s Liz Claiborne launch has been “overwhelmingly positive”.  Interestingly, the brand has not been officially launched, as marketing efforts are slated to begin in mid-September.  Unfortunately, a couple of weeks worth of data, while positive, is too limited to draw a conclusion on the ultimate success of the launch.


- Fashion blogs are abuzz with Talbots latest marketing campaign.  As the company continues its transition towards a more youthful (not teen, but younger) image, the latest print ads featuring Linda Evangelista are out and gathering attention.  The next step is to see if the marketing shift will translate to a sustained pick up in fall sales as “tradition is transformed”.


- While e-commerce may still present one of the greatest opportunities for growth for the retail sector in general, it does not look like it will be driven by further broadband adoption.  After several years of uninterrupted growth, consumer use of high speed internet access at home appears to be hovering around 66% of American adults.  This represents a small (up 5%) increase from the prior year and the smallest increase in seven.


- If you thought holiday sales promotions came early last year, the “Christmas Creep” will be upon us even earlier in 2010 according to an annual benchmark report from Experian Marketing Services. While Target’s “Black Friday in July” sales appeared aggressive at the time, we can expect more of the same from other retailers looking to capitalize on early movers as consumer spending trends become increasingly less certain heading into the 2H.





Long Beach Port Cargo Traffic Increases in July - The monthly container cargo count at the Port of Long Beach increased for the eighth straight month in July 2010, rising 35.8%. Imports were up 32.5%, while exports rose 16.4%. Empty containers, which are mostly bound overseas for refilling, were up 63.1%. <polb.com/economics>

Hedgeye Retail’s Take: Despite concerns over consumer spending in the 2H, container traffic continues to suggest retailers are betting on stronger demand heading into the holiday sales season.

R3: LOW: Gradual Fade (Expected) - 2


Cotton Climbing Higher to 1995 Peak - Cotton may climb to the highest price since 1995 as rising demand in emerging markets for everything from shirts to bed sheets forces textile makers to restock inventories that are the tightest in 13 years. Export sales by the U.S., the largest shipper, are off to their fastest start since 1993 as apparel demand in China, the biggest consumer, increased 24%, government data show. Cotton may advance 13% to a 15-year high of 94.9 cents a pound before new supplies are harvested in October, according to 17 analysts surveyed by Bloomberg on Aug. 12 and Aug. 13. The commodity is projected to extend its gains because demand is growing in Asia’s developing nations, even as signs emerge that the U.S. economic recovery may slow. While the rally is enriching some cotton investors, it’s also boosting costs for Levi Strauss & Co. and Hanesbrands Inc. <bloomberg.com/news>

Hedgeye Retail’s Take: Surging higher following Thursday’s USDA crop report and continued flood damage in Pakastan, the rising cost of cotton is exceeding all estimates despite expected cost inflation in the 2H. Recall, Gildan with ~30% of COGS exposed to cotton noted last week that ~$0.80/lb. cotton would impact earnings by $0.50 next year on a ~$1.60 base…less than a week later, that view appears increasingly optimistic. HBI notes that its exposure is closer to 6-8%, but keep in mind that this understates the true impact as HBI buys much of its cotton FOB (i.e. it’s an indirect cost instead of a direct cost).


Shopping Habits Forever Changed? - Marketing firm BrainReserve doesn’t see women going back to their ferocious shopping habits once the economy fully recovers. The entire consumer mentality has changed across the socioeconomic spectrum. So is this the dawn of a New Consumer Age, as many experts contend, one that will force brands and retailers to make tectonic changes in the way they do business and transform the nature of shopping in America. It’s clear the shopping rules have changed and key trends include:

• The boom in e-commerce, making it easier for consumers to buy from home — and to comparison shop.

• Technology is now more fashionable than fashion — in other words, teens and twentysomethings would rather buy an iPad than a handbag.

• Social networks are driving real consumption, with friends telling friends about hot products or brands — meaning brands have to enter the conversation.

• The Great Recession has forced everyone, even the rich, to alter their shopping behavior and buy less.

• High levels of personal and household debt continue to constrict the Baby Boomers, who are looking for simplicity and value. <wwd.com/retail-news>

Hedgeye Retail’s Take: Call it “ferocious shopping,” or whatever you want, but excessive spending is officially taboo and frugal is in – a trend we don’t expect to change anytime soon.   


Half of Local-Made Leather Shoes Disqualified in Recent Sampling Test - Shanghai Consumer Protection Committee has recently conducted a sampling test on locally manufactured leather shoes which revealed that about 45% of samples were not up to the standard. For the testing, twenty-nine pairs of shoe were sampled from Shanghai markets including five pairs of men’s shoes and twenty-four pairs of lady’s shoes that were made in Shanghai, Zhejiang, Jiangsu and Guangdong province. The test results found that thirteen pairs of leather shoes were defected in the nine technical parameters including appearance quality, peeling strength and heel fastness. <fashionnetasia.com>

Hedgeye Retail’s Take: Wage inflation isn’t the only reason for the shift of global manufacturing out of China towards countries like Vietnam and Indonesia. While we’re not certain quality standards are any better in these countries, an alternative is usually preferable to results such as these.


Nike Inks License Deal With Athlete Performance Solutions - Athlete Performance Solutions has teamed up with Nike for a line of pinnacle, performance footwear for sailing, rowing, fencing, weightlifting, boxing and shooting. The footwear is hitting retailers now. Discussions are in the works for retail partners in sailing and shooting, as well as premium retailers. <licensemag.com>

Hedgeye Retail’s Take: Why not? Footwears pre-eminent brand is targeting smaller markets albeit with considerably less competition.


H&M July Comps Improve by 10% - Hennes & Mauritz AB said same-store sales in July increased 10%, compared to 9% in June. Including new stores, total revenues for the month of July grew 21%, versus 20% in the previous month, showing a strong improvement on the same period last year. H&M had experienced a weaker-than-expected performance this April and May due to cold weather across key markets. <wwd.com/business-news>

Hedgeye Retail’s Take: Fast-fashion continues to be a relative outperformer within global retail.

R3: LOW: Gradual Fade (Expected) - 3


eBay Invests in General Manager of eBay Fashion - In an effort to grow its apparel business, eBay has made recent investments in technology. Now it’s investing in people. Miriam Lahage has been named general manager of eBay Fashion, a new position. A 20-year veteran of The TJX Cos. Inc., Lahage founded Koodos.com, an online discount luxury boutique based in the U.K. At eBay, Lahage will be responsible for growing and driving innovation across the site’s fashion category, which did $5.4 bn in worldwide gross merchandise volume last year. Part of her job will be to attract more brands to eBay to give a fashion and editorial point of view. Lahage wants to bring more consistency to the apparel presentation on eBay’s selling platforms. <wwd.com/business-news>

Hedgeye Retail’s Take: Creating a more consistent apparel presentation for a retailer that will always be known for its consumer generated auction supply sounds like an impossible task. If eBay can ramp its new offerings rather than used merchandise there in an opportunity to gain share, however that segment of the market is getting increasingly more competitive behind the likes of RueLaLa and Gilt Groupe – eBay is wading into deeper waters with this one.


Last week, 7 of the 8 risk measures registered negative readings on a week-over-week basis and one was positive.


Our risk monitor looks at the following metrics weekly:

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

2. CDS for large European Financials (39 companies)

3. High Yield

4. Leveraged Loans

5. TED Spread

6. Journal of Commerce Commodity Price Index

7. Greek Bond Spreads

8. Markit MCDX


1. Financials CDS Monitor – Swaps widened last week for all 29 reference entities.  Conclusion: Negative.


Widened the most vs last week: JPM, WFC, MBI

Widened the least vs last week: AON, PRU, CB

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

Tightened the most vs last month: MET, PRU, MBI




2. European CDS Monitor – In Europe, swaps for 37 of the 39 reference entities widened and 2 tightened, with an average widening of 9.0% week over week.   Conclusion: Negative.


Widened the most vs last week:  Societe Generale, Alpha Bank, National Bank of Greece

Tightened the most/widened the least vs last week: Danske Bank, DnB NOR, Nordea Bank

Widened the most vs last month: Hannover Rueckversicherungs, Banco Popular, Intesa Sanpaolo

Tightened the most vs last month: Nordea Bank, UBS, DnB NOR




3. High Yield (YTM) Monitor – High Yield rates rose 17 bps last week. Rates closed the week at 8.47% up from 8.30% the week prior. Conclusion: Negative.




4. Leveraged Loan Index Monitor – The leveraged loan index fell 2 points last week, closing at 1491 versus 1493 the week prior. Strong momentum in July appears to have eroded.  Conclusion: Negative.




5. TED Spread Monitor – Last week the TED spread fell 5 bps, closing at 22 bps versus 27 bps the prior week. Conclusion: Positive.




6. Journal of Commerce Commodity Price Index – Last week, the index fell 4.5 points, closing at 13.65 versus the prior week’s close at 18.11.  Conclusion: Negative.




7. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields rose 33 bps, ending the week at 1048 bps versus 1015 bps the prior week. Conclusion: Negative. 




8. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads rose last week, closing at 213 versus 206 the prior week.  Conclusion: Negative.




Joshua Steiner, CFA


Allison Kaptur


The Macau Metro Monitor, August 16th, 2010



MGM Macau president, Grant Bowie, said that the company is "financially safe and secure" to invest in a "high-end integrated resort" project on Cotai.  MGM is still waiting for approval from the Government.  Bowie also said, “I don’t see Macao Studio City land as an option right now because it is owned by someone else,” Mr Bowie said.



According to the president of the Cross-Strait Tourism Exchange Association (CTEA) in China, China is currently discussing the potential to open up the individual traveling scheme to Taiwan.  Since 2008, Taiwan has allowed mainland tourists to travel on package tours with a stay of the maximum 15 days.



Local real estate agents in Macau are concerned that HK speculators who are shifting their focus to Macau because of new restrictions may overheat Macau's property market.  HK SAR government declared new curbing rules, starting August 13, that prevent purchasers of flats to re-sell, sub-sell or transfer the benefits of the agreements for sale and purchase before the transactions are completed.  The department also required buyers to forfeit 10% instead of 5% of the total purchase price if the transactions were canceled.

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Capital Chases Yield

“Now I know that I can win and that I can beat the best players in the world.”

-Martin Kaymer               


Martin Kaymer persevered at Whistling Straits in Kohler, Wisconsin yesterday to capture the 92nd US PGA Championship. The 25 year-old German is only the second player from Germany to win one of professional golf’s 4 majors. With 5 foreign born players finishing in the top 10 this weekend, I couldn’t help but notice that this world continues to become more interconnected and competitive by the day.


In the end, the best players in the world will get the most attention, capital, and respect. When it comes to capital markets, this is a critical point for long-time US-centric stock market investors to acknowledge. Capital changes hands every day. Capital seeks winners. Capital chases yield.


On the stock market side of the scorecard, Kaymer’s Germany scores better than the US does at this stage of the 2010 game. For the YTD the German DAX is +2.6%, whereas the US (SP500) is down -3.2%. That’s a 580 basis point performance spread.


Our top-flight analyst on European strategy, Matt Hedrick, has written extensively on Germany this year (email if you’d like to see his most recent research), but here are some summary points distinguishing Germany versus the US that are important to consider:

  1. German y/y GDP growth is currently stronger than in the US
  2. German unemployment is lower than in the US (7.6% vs. 9.5%)
  3. German fiscal policy is more conservative than in the US (85 BILLION Euro austerity package vs. no austerity).

As a result, global capital is realizing higher rates of return whether invested in German Bunds or German Equities relative to US Treasury yields (hitting all time lows) and US equities (down in 11 of the last 14 days). In hindsight, this probably makes as much sense as most things do in the rear-view mirror.


What doesn’t make any sense is an expectation that the Fiat Republic in Washington will win market share for global capital fund flows by marking America’s “risk free” rate of return at ZERO percent. This is going to chase capital out of this country for an “extended and exceptional” period of time.


Notwithstanding the fact that Japan has seen more net funds flow into Japanese Government Bonds than the US has seen from China into US Treasuries in the last 6 months, the Japanese have already taught the world that it’s very possible to chase capital out of a large economy for decades. Enough fear mongering about the “great depression” here folks, we need to wake up, smell the coffee, and get America back to winning again.


Japan’s GDP growth continues to be hammered down by elevated levels of debt. Last night the Japanese reported another awful GDP number for Q2 of 2010. In a global demand environment where China and its South East Asian neighbors were growing double digit GDP growth rates, Japan grew 0.1% sequentially to 0.4% year-over-year. QE-Japan – nice…


Japan didn’t have a player make the cut this weekend at the PGA Championship either (Yuta Ikeda was 2-OVER and No-mora by Saturday). Japan’s population growth is negative and there isn’t a lot to smile about in the island nation once expected to see real-estate prices grow like tulips to a 16th century sky. As China overtakes them this morning as the world’s 2nd largest economy, Japan’s losing streak continues with the Nikkei down -12.8% YTD.


But have no fear, Paul Krugman and the Fiat Fools are here… telling you (like Krugman did in 1997 with his “PRINT LOTS OF MONEY” advice to the Bank of Japan), that it’s time for QE2, 3 and 4. No wonder why Kaymer and China’s Wen-chong Liang (tied for 8th at the PGA this weekend) think they can beat the best players in the world. America’s ball is in the water – and we’re trying to fight oncoming water with more “liquidity.”


Last week was not a good week for the US on the stock market scorecard. With the SP500 broken across all 3 of our core investment durations (TRADE, TREND, and TAIL), here’s the updated immediate term TRADE ranges for US indices:

  1. SP500 = 1072-1098
  2. Dow = 10,2380-10,554
  3. Nasdaq = 2160-2244
  4. Russell2000 = 603-639

While the perma-bulls were begging Bernanke to take on more QE water, the market’s reaction to QE Light was:

  1. Stocks DOWN (-3.7% wk/wk)
  2. Volatility UP (VIX +21% wk/wk)
  3. 2-year yields UP (closing the week at 0.53% vs. 0.51% in the wk prior)

What was probably least expected was US short rates going up on the week. Then again what’s least expected by consensus is where winners in this part of the 21st century are going to find they can beat the former best players in the world. Capital will chase yield as score changes every day.


On Friday morning’s opening market strength we sold our long Singapore position (EWS) and raised our position in Cash from 55% to 61%. My immediate term TRADE lines of support and resistance this morning are 1072 and 1098, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Capital Chases Yield - kaymer



As we look at today’s set up for the S&P 500, the range is 26 points or 0.7% (1,072) downside and 1.7% (1,098) upside.  Equity futures are trading below fair value after Japanese Q2 GDP data came in below expectations providing evidence QE does not revive economic growth.


The important MACRO data is due out tomorrow are PPI, Housing Starts/Permits and Industrial Production.  On the earnings front, retailers will be in focus this week with Lowe's, Home Depot and Wal-Mart reporting.

  • ADVANCE/DECLINE LINE: -278 (+158) positive on a down day - day 2!
  • VOLUME: NYSE - 871.65 (-13.47%) - 2nd slowest day of the week!
  • SECTOR PERFORMANCE: One sector positive - XLU
  • MARKET LEADING/LOOSING STOCKS: Nvidia +4.8%, Ameren +3.2 and Nordstrom (-7.15%) and Devry (-5.74%)


  • VIX - 26.24 1.98% - Big move last week up 20%.
  • SPX PUT/CALL RATIO - 1.83 down from 2.98 (low of 0.87 on 07/15/10)


  • TED SPREAD - 22.43 0.203 (0.913%)
  •  3-MONTH T-BILL YIELD .15% Unchanged
  • YIELD CURVE - 2.2063 to 2.1408 (close)  - Now at 2.1265 


  • CRB: 268.79 -0.03% (ugly week down 2.15%)
  • Oil: 75.39 -0.46% (-6.58% last week)
  • COPPER: 327.25 -1.00% (-2.72% last week)
  • GOLD: 1,214 +0.11% (up 0.79% last week)


  • EURO: 1.2754 -0.74% - (trading down 3.96% last week)
  • DOLLAR: 82.948 +0.38%) - (trading up 3.16% last week)


  • ASIA - Asian markets traded mixed after data from Japan showed Q2 GDP rose +0.4%, worse than the median forecast for 2.3% growth; China traded up 2.1%.
  • EUROPE - Major markets are trading lower as weaker than expected Japanese Q2 GDP sets the early tone
  •  EASTERN EUROPE - Trading mixed to higher - Russia is struggling while Romania is up 1.4%.
  • MIDDLE EAST/AFRICA - UAE is trading higher 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













EARLY LOOK: Friday the Thirteenth

This note was originally published on August 13, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK in real-time, published by 8am every trading day.




“Dude, that goalie was pissed about something.”
-Freeburg (Freddy vs. Jason, 2003)
It’s certainly been an interesting week and its ending with a flurry of shots on goal for global macro risk management net-minders. Sophisticate coaches from Mass call them “net-mind-ahs” by the way. Canucks call dem de goalies, eh.
Today is also Friday the 13th, and de goalies with de coaches who got dem-selves lee-verd up long last week are feeling shame. The most infamous American goalie mask of them all has to be Jason’s. He’s seen a lot of red rubber as of late.
Another American who found fame on this day in 1907 was a stock market manipulator from Massachusetts by the name of Thomas W. Lawson. Ole Lawsy tried to slip one by de goalie back then by publishing a book titled “Friday The Thirteenth”, which attempted to scare the horses into believing that the market was setting up for a crash on that very day (his book sold 28,000 copies in its 1st week).
Per Wikipedia, Lawsy was “a highly controversial Boston stock promoter – he is known for both his efforts to promote reforms in the stock market and the fortune he amassed for himself through highly dubious stock manipulations.” He was a hybrid Barney Frankenstein - fear mongering Americans, then flip flopping his position to the other side of the trade. All the while forgetting that people would remember what he said/did on the last go around.
While stock market futures have whipped around a great deal this morning, the Dodd-Frankenstein reform bill doesn’t appear to be today’s excuse. Germany reported a blockbuster Q2 GDP report (+2.2% sequential growth) and Europe’s “net-mind-ah” has apparently left the building on the news. European markets are being chased lower by the old Friday The Thirteenth fear that we call ‘selling on the news.’
In addition to the week-to-date Nightmare on Wall Street drop of -3.3%, here’s what is legitimately scaring US equity investors (in the order that the data points occurred):
1.      China bought 456B Yen worth of JGB’s (Japanese Government Bonds) in June = most since 05’ (and remains a net seller of US Treasuries).

2.      Goldman Sachs (Jan Hatzius) cut his US GDP growth estimate to 1.9% for 2011 (that’s the closest estimate to Hedgeye’s 1.7%).

3.      Chinese Imports dropped 1100 basis points sequentially in July to 23% (vs. 34% in June) = Chinese demand continues to slow.

4.      Chinese property prices dropped to +10.3% y/y in July versus +11.4% in June.

5.      USA’s NFIB survey for small business confidence hit another sequential low this month dropping to 88.

6.      Bernanke’s QE2 was met with selling of both US stocks and get this, Treasuries!, with this morning’s 2-year yields trading UP versus Tuesday.

7.      China’s bank regulator ordered the transfer of off-balance sheet loans to its books by 2011 (and make provisions for defaults)

8.      US MBA mortgage applications held flat week-over-week, enforcing the reality that Americans refuse to lever themselves up again.

9.      Chinese industrial production, retail sales, and money supply growth (M2) all slowed again sequentially in July versus June.

10.  Chinese inflation hit a 20 month high, accelerating +3.3% in July versus +2.9% in June = oil, food… you know… the things they need.

11.  Venezuelan and Argentinean bond yields pushed higher as their dysfunctional governments try to issue the world sovereign debt.

12.  America’s budget deficit tacked on another $165 BILLION loss in July, taking spending up +10% y/y with tax revenues barely flat.

13.  Russian Bond sales saw only 44% of the demand de goalies in de Kremlin were looking for (25 BILLION Rubles) = Russian bond yield up.

14.  General Disaster (GM) announced their pending $12-16 BILLION Dollar IPO = 2nd largest IPO in US history; what is wrong with America?

15.  US weekly jobless claims ripped higher to 484,000 = representing the highest jump in rolling weekly claims for 2010 YTD!

16.  The Fed’s Balance sheet expanded again week/week going up to $2.33 TRILLION DOLLARS after Ben bought $1.7B more MBS this week!

Sorry, for penmanship’s sake I tried to go with 13 bearish points, but I had to print 16 as pushing Hedgeye’s own book of ideas trumps my literary aspirations.
Look on the bright side, Monday will be a new day for the professional storytellers in Washington and it won’t be Friday The Thirteenth either. By the way, Thomas W. Lawson died poor.
On a fair amount of bearish global macro news, I’ll call the SP500 fairly oversold at 1080 or lower. As a result, we’ll open up the Hedgeye Asset Allocation coffers and move from 70% cash (last Friday) down to 55% on this Friday the 13th, 2010 by going to a 6% allocation to US Equities.
My immediate term TRADE lines of support and resistance for the SP500 are now 1080 and 1197, respectively, eh.
Best of luck out there today and have a great weekend with your families,