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One of the first screens we use to identify potential long or shorts is sell-side sentiment versus short interest, which is expressed via the days to cover ratio.


Looking at the data since I penned my DUPE(d) Early Look on June 29, 2010, it is clear that the trends for the American consumer are not getting any better.  We are getting closer to 4Q10, which is the quarter in which significant pressure on the consumer should become more evident.   We estimate that consumer discretionary spending could be down as much as 3% in 4Q10.     


As of the close yesterday, Consumer Discretionary was the second best performing sector year-to-date and one of only three sectors that is up year-to-date (XLY up 4.9%).  The other two sectors are Industrials (XLI up 7.4%) and Consumer Staples (XLF up 2.1%).   While easy comparisons and “corporate” fiscal austerity have helped the performance of consumer stocks, the best days of this cycle are behind us.


Today, the XLY is the best performing index, up 1.4% at the time of writing.  The positive consumer sentiment is being driven by the increase in mortgage applications, following a surge in refinancing.  In theory this should help consumer spending.  Also, restaurant sales trends are looking better with the Knapp-Track showing an increase of +0.9% (Traffic of -1.7%) vs. -8.3% last year; this is the first increase in 26 months.  Of the ten best performing names in the XLY today 6 are retailers.  Expedia is the worst performing stock in the XLY sector. 


As a reminder, the DUPE(d) thesis looks like this…


Double-Dip:  The housing market and the broader economy are on the precipice of a double dip; housing prices have already started to decline and the economy has slowed significantly quarter-to-quarter in 2Q10.


Unemployment:  Weekly Jobless Claims have not shown any material improvement over the past six months.


Prices Paid by the Consumer:  While reported inflation by the government looks to be under control, the Hedgeye Inflation Index tells a different story.  The Hedgeye Inflation Index focuses on the part of the economy showing inflation that impacts the consumer, specifically the spread between the prices of things they buy and what they earn.


Equity and Real Estate deflation:  We believe that the debasing of any currency (even the Almighty Dollar) ends badly.  A lack of austerity in government policies and our politicians’ aversion to facing facts are not helping the long-term outlook for equities.


Looking at the Hedgeye Sector Sentiment Monitor, the street has become more optimistic about the XLY relative to six months ago; sentiment on the XLY stands at 60.01 vs. 56.53 six months ago and 58.9 for the S&P 500. 


Within the Consumer Discretionary index, the three most loved sectors are Diversified Consumer, Hotels Restaurant & Leisure and Internet & Catalog Retail.  Narrowing it down further within those sectors, the most loves names are Darden (DRI), McDonald’s (MCD), Starbucks (SBUX), Expedia (EXPE), Amazon (AMZN) and Devry (DV).  Collectively, these stocks have a 16.2% weighting in the index, with MCD representing 7.8%.


Howard Penney

Managing Director












CHART: HOUSING SUMMIT OFFERS EARLY GLIMPSE... - Screen shot 2010 08 18 at 9.57.11 AM


China: The Great Shift Forward Part II

Conclusion: China’s decision to open up its bond market to foreign investors is likely a major catalyst for widespread internationalization of the yuan. Furthermore, we believe this decision has major implications across asset classes globally over the next 10-20 years.


Yesterday, we published a note on the intermediate-to-long term outlook for the Chinese consumer, and within that note, we briefly touched on China’s policy announcement to open up its interbank bond market to qualified foreign institutional investors.  The key takeaways were: a) to accelerate capital flows from abroad by opening up its domestic securities market and b) to make its currency more attractive to foreign central banks by broadening its use globally. Traditionally, trade has been the main way for foreign holders of yuan to return money to China. By opening up its $2.1 trillion interbank bond market, China is now creating new avenues for foreign investors to invest in China.


We believe this decision has major implications across asset classes globally, particularly as it relates to the dollar, commodities, and U.S. corporate and government debt over the next 10-20 years. But before we get into key takeaways at it relates to investment opportunities, allow me to briefly summarize the reforms China is putting in place: 

  • China will let foreign financial institutions invest yuan holdings in China’s interbank bond market. As of the end of July, 97 foreign financial institutions including Goldman Sachs and JP Morgan Chase have received approvals from the securities regulator for investment in local currency bonds and equities.
  • Expanding upon a program started with Hong Kong in June ’09, China will open up cross-border yuan settlement to foreign central banks and clearing banks.
  • Further proposals are out to allow foreign investors to win quotas to invest in China’s yuan-denominated A-shares.
  • Shanghai is reported to be considering foreign investment in yuan-denominated private equity and venture capital funds. 

Combined, these reforms are significant, as it expands yuan transactions beyond just trade settlements. By granting foreign institutional investors greater access to investment opportunities, China is likely to spur global demand for yuan-denominated assets, ranging from securities to savings deposits. Furthermore, we believe that with this increased demand outlook, the yuan will receive incremental upward pressure over time, as popularity and investor comfort grows.


From an international FX reserves perspective, we believe this news is also bullish for the yuan from both an appreciation standpoint and from a diversification standpoint. As investor confidence grows, so should the confidence of foreign central bankers as it relates to holding yuan-denominated assets. In July, China agreed to a three-year currency swap with Singapore worth 150 billion yuan in addition to the 650 billion yuan of outstanding swap agreements with Indonesia, Malaysia, South Korea, Hong Kong, Argentina, and Belarus.


So what does this all mean as it relates to investing? First, we believe this is likely to be a catalyst that accelerates a likely secular up-trend in the yuan’s FX rate. We believe in the yuan as a percentage of international FX reserves will grow substantially over the next decade or two as foreign central banks diversify their FX exposure away from U.S. dollars.  The latest data from the IMF supports our view that the U.S. dollar as a percentage of international FX reserves is mired in a secular down-trend that is not likely to end anytime soon. After falling from 71.5% in 1999 to 62.2% in 2009, the dollar continued its decline in 1Q10, dropping to 61.5% of global FX reserves. China has been leading the charge away from the U.S. dollar: in June it reduced its holdings of U.S. Treasuries by the most ever on a monthly basis, favoring Japanese government and Korean treasury bonds of late (+$20.1 billion and +$2.45 billion, respectively Jan-June). China’s KTB holdings grew 111% Y/Y in Jan-June period and the country is on pace to buy roughly 4 trillion won of KTB’s by year-end.


We are at the start of what looks to be a secular shift among global investors away from a low-growth, low-interest rate environment in the U.S. and towards high growth, high(er) interest rate environments in parts of Asia – particularly in the Indonesia, Singapore, Thailand, Malaysia and, of course, China. Malaysia today posted a +8.9% 2Q10 Y/Y GDP growth figure and raised guidance for the full year – citing a pickup in domestic growth in spite of slowing growth in advanced economies. Contrast that with TGT’s top line miss and soft guidance from this morning, and you can see clear as day that the world is changing and that capital will continue to chase yield either through growth or high interest rates.


Lastly, we feel that the Chinese economy will benefit from increased access to foreign capital. As growth slows in the Western economies, any investment within China catered towards producing goods for a Western consumer will slow. The broadening of China’s capital markets may ultimately serve to direct investment towards China’s domestic industries where development is needed in order to accommodate its growing consumer base. On the margin, this is a bullish catalyst for the Chinese consumer and, as a side-effect, bullish for the goods they will need (agricultural commodities, automobiles, electronics, etc.). Obviously, these structural changes won’t be fully developed in the near term, so we’ll continue to manage risk throughout the lengthy, long term ascent of the Chinese consumer.


Darius Dale



China: The Great Shift Forward Part II - 1

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Bullish On Brazil: Cautious Boom

POSITION: Long Brazilian Equities (EWZ)


After outperforming US equities for the better part of the last week  and trading up for the last 4 days, consecutively, the Bovespa in Brazil is taking a bit of a breather today. We’re going to stay long Brazil via the EWZ etf.


Moshe Silver did his usual translation of the Portuguese press this morning and had the following insights on what Latin America is starting to cautiously refer to as a boom:


“Fundacao Getulio Vargas, Brazil’s leading social and economic policy research university, working with Germany’s IFO institute, says the Latin American Economic Climate Index rose from 5.6 to 6.0 points between April – June of this year.  According to FGV, the combination of positive current readings, together with current projections, suggests that Latin America has entered a boom for the first time since July 2007, though the decline in projections leads FGV to characterize this as “a cautious boom.”


The current measures component of the index rose from 4.7 to 5.8, while the expectations component declined from 6.4 points to 6.2.  The FGV report said “the historical series of the economic climate index, going back to January 1990, shows that an economic climate index reading of 6 should be read as very favorable.”


For Brazil, the current measures component rose from 8.1 to 8.4, while expectations declined from 6.4 to 6.1, resulting in an unchanged reading of 7.3 points.  Argentina, Chile, Paraguay and especially Mexico showed higher readings.


The FGV report said “the situation in Latin America – as in the rest of the world – suggests caution.  In the Latin American countries studied, expectations started to decline from October 2009 through January 2010.  Nonetheless, analysis of current measures showed a reverse pattern.  The experts expected the worst, which did not come to pass.  Then they got better results out of current measures.  Still, they are not sure of how solid the recovery is.”


The intermediate term TREND line of support for the Bovespa is now 64,290.




Keith R. McCullough
Chief Executive Officer


Bullish On Brazil: Cautious Boom - 2

Sporting Goods’ Dynamic Duo

Here are some of our thoughts on both Dick’s and Hibbett’s headed into the Thursday and Friday’s prints respectively.



Our view is that the company will deliver on sandbagged guidance again after the close. The setup remains positive with the easiest top-line compare of the year and favorable GM compares. We expect comps to come in ahead of the guided range for the sixth straight quarter though we see the spread starting to compress (see chart below). A strong footwear cycle and benign promotional environment was a positive tailwind in the quarter. Also each qtr that passes leaves more opportunity for cycling investments in .com and planning systems.

  • As it relates to EPS – our model is coming in at $0.48 vs. Street at $0.41 and guidance of $0.37-$0.39 driven by comps. Given trends in the channel throughout the quarter, it’s virtually impossible to get to the +4%-5% comp they guided to unless we assume hardlines decelerated at a surprising rate. Weather was little changed in DKS territory relative to last year and other parts of the country. In addition, they are going up against -2% traffic trends and -1%-2% ticket trends in the quarter. After posting a +6.4% increase in traffic on a -2.5% in Q1, we expect similar albeit modestly lower sequential results to drive a +6.5% comp in the quarter.
  • GM%: +200bps has potential for upside. The sales/Inventory spread coming out of last quarter is in a relatively good position on our SIGMA chart suggesting inventory levels are in good shape. Lapping aggressive clearance activity at both Golf Galaxy and Dick’s and the incremental benefit of World Cup sales could drive upside.
  • SG&A: +11% yy continues to be the greatest variable. The company will continue to incur deferred investments in systems to optimize regional product assortment that will add an incremental ~$8mm in the quarter similar to Q1. While nearly 80% of remaining store growth in 2010  is expected to hit next quarter, any acceleration of plans could result in higher incremental preopening expenses.
  • Despite a strong 1H, and what is likely to be an upward adjustment to full-year guidance, there’s no reason for Ed Stack to change his (effective) sandbagging style.

For the year, we're at $1.58 vs. Street at $1.46 and guidance of $1.41-$1.44. Next year is $1.75.

Sell-side sentiment is a 70/30 split between bulls/bears compared to 55/45 3-months ago.

Insider activity has been relatively quiet. Short interest remains below 10%.


We don't love the story long term due to its latent rent hurdles due to aggressive growth posturing. But near term, the R&D cycle out of the brands is helping, and that should last at least through CY11. We're not averse to owning this.


Sporting Goods’ Dynamic Duo - DKS comps 8 10


Sporting Goods’ Dynamic Duo - DKS CompGuid 8 10



The bottom-line is that the company should print something starting with a 2, vs. the Street at $0.16 cents. The setup for the quarter is about as solid as it gets – against the worst comp in company history along with extremely favorable GM and SG&A compares. Consensus estimates equate to a ~14% comp based on our math – we’re at 16%. Like DKS, a strong footwear cycle and benign promotional environment continues to bode well for HIBB. 

  • As it relates to EPS – our model is coming in well above consensus at $0.22 vs. Street at $0.16 driven primarily by comps (we expect the addition of six new stores to add ~$5mm, or 4% to Q2). Sales were strong in the channel based on our trend data throughout the quarter (see charts below) with several incremental data points supporting our expectation for relative outperformance. First, employment figures in the southeast/central have been better than was largely expected driven by a BP funded stimulus. In addition, more favorable weather in Hibbett’s most concentrated regions compared to last year, gas prices that have receded from the critically important $3 level since the end of Q1 to ~$2.70, and both traffic and ticket going up against MSD declines in Q2 FY09 all contributed to regional outperformance as seen in the chart below. Anecdotally, Wal-Mart highlighted that traffic improved sequentially during the quarter – a trend we expect HIBB to confirm given declining comp trends last year down -8% in May, -10% in June, and -14% in July.
  • GM%: +350bp could even prove conservative. Sales/Inventory spread ended last quarter in solid position on our SIGMA chart – suggesting that inventories are lean. In addition, the company is lapping a period of aggressive clearance activity that impacted margins by at least 100bps in the year ago period as well as a spike in occupancy expense that accounted for another 130bps. A swing in both of these components along with a benign promotional environment relative even to Q1 could lead to further upside in product margins.
  • SG&A: +10% yy. While comping against a significant increase in comp and benefits last year, we expect absolute growth to be marginally higher than Q1 (+9.6%) due primarily to the addition of an estimated six new stores as well as opportunistic marketing spend that management highlighted on the last call. A key variable here is the potential for accelerated store growth should opportunities to acquire additional Movie Gallery/Blockbuster locations become available sooner than expected – not something we expect, but would view favorably as an accelerant to 2H revs.
  • Lastly, despite decelerating trends over the last few weeks ahead of BTS, we expect the company to raise year-end guidance for the third straight quarter primarily based on Q2 results.

Q1 YouTube:

"in terms of our guidance, we hope to increase it again in August and then again in Q3, but depends on the macro." – Mickey Newsome


For the year, we're at $1.60 vs. Street at $1.52 and guidance of $1.35-$1.50. Next year is $1.80.

Sell-side sentiment is about 60/40 split between bulls/bears.

Insider activity has been relatively quiet following sales in March. Short interest has come down from 32%, but still stands at a toppy 24% - high for such a good model.



Net/Net, numbers are likely to come in better than expected this quarter for both DKS and HIBB and there are going to be many reasons as it relates to the industry cycle why trends should continue for both players.


Sporting Goods’ Dynamic Duo - HIBB TrendData Q2 8 10


Sporting Goods’ Dynamic Duo - HIBB GasPrices Q2 8 10


Sporting Goods’ Dynamic Duo - HIBB RegionalTrends 8 10


Sporting Goods’ Dynamic Duo - DKS HIBB S 8 10


Sporting Goods’ Dynamic Duo - Fw App Ind Data 8 10


Casey Flavin, Director


EARLY LOOK: Winner's Tranquil

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





"To play well you must feel tranquil and at peace. I have never been troubled by nerves in golf because I felt I had nothing to lose and everything to gain.”        -Harry Vardon



Having tired of reading about the collapse of societies, currencies, and politicians, I have shifted gears in my mid-August reading schedule to something I am much more proud of pursuing in this good life than the fate of the Fiat Fools – winning.
What’s most interesting about the aforementioned quote isn’t that it comes from one of the world’s all-time great golfers, it’s that it comes from a man who had a nerve in his right hand that had been impaired by tuberculosis.
Despite the obvious disadvantage Harry Vardon had in a critical component of his game (putting), the man didn’t whine or complain. He didn’t point fingers either. He focused his mind and energy on what he could control.
In “The Grand Slam – Bobby Jones, America, and the Story of Golf”, Mark Frost wrote, “opponents felt as if Harry wasn’t even aware of their presence, and they weren’t wrong; experience had taught him that his opponent was the golf course, not the other guy.”
Vardon graced this good world between May 9th, 1870 and March 20th, 1937, winning the British Open Championship a record 6 times along the way. He was never the longest off the tee. He was never the flashiest player either. Harry Vardon was a Risk Manager.
On avoiding losses, Vardon once said that “more matches are lost through carelessness at the beginning than any other cause.” When it comes to modern day US monetary and fiscal policy doesn’t that ring in your ears?
Unfortunately it’s a lot easier to read that lesson than to execute on it. President Obama definitely has his work cut out for him on this score. After coming back from some much deserved peace and tranquil with his family on vacation, the President of the United States stepped right up into the tee-box of US mid-term election qualifiers delivering the following shot:
“We have a choice between the policies that got us into this mess and the policies that are getting us out of this mess.”
OK. Shot made. Predictably, all replays of this opening shot have been recorded by partisan pundits on both sides of the gallery. But can’t Americans do better than this?
I’m certain that we can. Both Bush and Obama signed off on empowering a losing economic ideology that’s taken this country and its balance sheet to its knees. It has been all about fear-mongering and now it’s playing on America’s nerves. Confidence is abysmal and spending is slowing. America’s winners are deeply troubled about a colossal “mess” in American politics – not about “the other guy.”
With all due respect Mr. President, it’s your ball now and you need to play it as it lies. Planning to have our central government’s economic planners come up with more plans to change the rules won’t work.
The solution here is to find a message that doesn’t focus on insulating America’s losers. We have to find a way to get back to winning. That starts with confident messaging. Confidence breeds success. Success builds confidence.
My immediate term supports and resistance lines for the SP500 are now 1062 and 1099 respectively. For now, we remain most confident in our short positions. We shorted the SP500 (SPY) at 1098 yesterday and we remain short the US Dollar (UUP).



EARLY LOOK: Winner's Tranquil - Screen shot 2010 08 18 at 9.10.43 AM


Best of luck out there today,

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