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FL: Chipping Away

Foot Locker continues to deliver on its strategic turnaround initiatives as evidenced by another quarter of sequential and year over year improvement on both the top and bottom lines.  For the bears out there, we are all well aware that same store sales of +2.5% fell short of the Street’s and our expectations (we were at 4.5%).  We’re not shying away from the fact that the topline is and will remain a key component of this turnaround.  However, the underlying message from the company’s conference call is “profitable growth”.  Gone are the days of chasing sales with aggressive promotions, selling commodity apparel at a loss, and building aged inventory over multi-year periods.  2Q results confirm that progress is well on its way towards higher sales and profits, a course which has really only been set in motion for three quarters now.  For the bulls, there is plenty to chew on. 

 

  • Even at a 2.5% comp increase (in which most regions and divisions hovered around the mean), 2Q marked the first time since 2005 that Foot Locker reported a consecutive increase in comp store sales.  It may not be a 5% increase, but consistency is building and the trend is clearly something to note.  Importantly, a pickup towards the end of the quarter and in early August gives management confidence to raise the same store sales outlook to a low to mid single digit increase for Q3.
  • Basketball not the culprit here.  Much speculation was made that the basketball category was extremely weak during the quarter, causing a drag on sales.  We didn’t hear anything on the call to confirm this.  Management did confirm our belief that on a go forward basis, there is much to be excited about from a product standpoint in the category.  The “Big Three” in Miami, Under Armour’s basketball launch, and perhaps even a resurgence from Reebok (ZigTech x John Wall) are all opportunities to drive improvement.
  • Elimination of unprofitable and aggressive promotions impacts the P&L in three ways.  First, transactions were down mid single digits. Second, ASP’s were up low double digits.  Third, merchandise margins improved 210 bps.  Part of the margin expansion reflects apparel’s sequential improvement, but the majority is due to lower markdowns, clearance, and promos.  This formula is expected to remain in place as higher priced technical running, fewer promos, and a substantial upgrade in apparel (technical and private label) drive profitable sales.
  • Many questions from those focused on the past are quick to point out that recent margin gains put overall gross margin rates near peak levels.  While factually accurate, we continue to believe there is opportunity to surpass peak for a number of reasons.  Most importantly, the apparel category as a whole is currently producing margins BELOW the company average and footwear.  Apparel for almost every other retailer on the planet carries a higher margin structure than footwear.  This is a huge opportunity for FL and one that is in the early stages of showing signs of life.  Apparel comps for the quarter increased by low single digits, a sequential improvement from being down low singles in Q1 and down high single digits in Q409.  According to management, the apparel assortment is about 50% towards being upgraded.
  • Inventories remain well controlled, down 5.1% against an essentially flat topline (positive comps offset by shirking store base).  We believe this is the one of the keys to the turnaround as the company continues to reduce inventories and increase turns.  Recall that in a 10 year history prior to 2009, FL grew sales at a rate higher than inventories every single year. 
  • Some slight tweaks to the company’s store opening/closing plans.  Management is now expected to open an incremental 5 units this year although the capex budget of $110 million remains unchanged.  On the flipside, closings may not reach the original goal of 150 units for two reasons.  First, some stores slated for closure are showing meaningful improvements in profitability as a result of the product and inventory initiatives put in place.  Second, as stores were slated to close landlords appear to be willing to strike longer-term lease concessions at favorable terms.  Recall that we have never been in the camp that major store closures were the key to this turnaround.  Getting the product, marketing, and sub-brand positioning in our view supersedes the decision to close meaningful amounts of stores. 
  • Lots of questions as expected on toning.  While the category has been a contributor, management was quick to point out that category growth is likely to slow in the back half as the industry anniversaries the hyper-growth of last Fall.  Second and more interestingly, FL appears to be more focused on capturing the sales opportunity with the female customer beyond a simple toning purchase.  This is particularly relevant for Lady Footlocker, which is the largest female athletic shoe and apparel chain in the U.S.  We continue to believe FL is working to build a sustainable women’s business for the long-term and as such, is not over indexing to the toning trend at the current time.

Net, net this was an essentially inline quarter driven by an impressive gross margin performance offset by a slightly weaker than expected topline.  There is nothing that we see in the 2Q results that change our view on the opportunity for the company’s turnaround or our above-expectation earnings over the next 12-18 months.  We’re tweaking our model a bit to reflect the lower earnings in 2Q relative our expectations, but still stand above the Street at $0.92 for the year.  We continue to believe that the opportunities to improve assortment, right size inventory levels, and profitably maximize FL’s market share dominance will unfold over the next 4-6 quarters. 

 

FL: Chipping Away - fl

 

Eric Levine

Director


The Brazilian Consumer: Capital Chases Yield

Conclusion: Don’t mistake yesterday and today’s weakness in the Bovespa for anything more than a global selloff due to weak U.S. economic data. At a point, U.S.-centric investors will be forced to look to places other than U.S. Treasuries and equities for a rate of return. We feel the emerging market consumer in places like China, SE Asia and Brazil will see the bulk of that investment.

 

Position: Long Brazilian equities (EWZ).

 

Today we sold our exposure to Indonesian equities for a modest 2.7% gain because we didn’t want to overstay our welcome, particularly as it relates to trade exposure to an increasingly weak U.S. consumer (10.5% of all Indonesian exports in 2009). Furthermore, we’d be remiss to suggest that exporting nations like those of SE Asia, China and Brazil will flourish if our estimate that U.S. GDP growth in 2H10 and 2011 comes in at about half of current consensus estimates. With that said, however, everything that matters in Macro happens on the margin. And in an environment where growth and trade are slowing globally, the marginal direction of domestic consumption will be paramount as it relates to where capital will likely flow.

 

We know what direction U.S. consumption growth is headed – down. Contrast that with the direction Brazilian consumption looks to be headed – up. As a result of favorable employment, inflation, and credit conditions, the Brazilian consumer is strengthening. Unemployment is 20bps off all-time lows, inflation has improved on the margin for the past three months (down to 4.6% in July vs. 4.84% in June), and, as a result of benign inflation, interest rate hikes have come to a halt (recent reports suggest the central bank expects 3Q inflation to come in below forecast, further reducing the risk of a Selic Rate hike).

 

The confluence of these three factors creates a bullish setup for the Brazilian consumer, which has been supported by recent data: 

  • Shopping Spree: Brazil’s June retail sales came in yesterday at +11.3% Y/Y, up from 10.2% Y/Y in May and the 1% M/M increase far exceeded consensus expectations of a 0.3% gain. The 11.5% gain in 1H10 was the largest gain ever on a six-month basis.
  • Taking on Debt: According to Brazil’s National Chamber of Commerce, the number of Brazilian families in debt rose from 57.7% in July, to 59.1% in August.
  • And Paying It Off: Credit reporting agency Experian reported a 1.74% delinquency rate among Brazilian checks in July – the lowest reading since 2004!
  • With High Hopes for the Future: For the fourth consecutive month, Brazilian families intend to consume more than the prior month. The consumer index of the National Chamber of Commerce rose 0.7% in August, to a reading of 134.4. Brazilians also expressed increasing satisfaction with their current employment and optimism about their professional opportunities, up 2% and 1.2% respectively. 

Globally, P.E.M.A.C. (private equity, M&A and capital markets) has been investing in this trend, and with the economic situation slowing in the U.S., we should see even more of this activity. According to KPMG Brazil, the number of Brazilian companies acquired by foreigners has more than doubled Q/Q in the second quarter. The 56 acquisitions (vs. 21 in 1Q10) was the highest second quarter number since the data started being tracked in 1994. Of the 77 total acquisitions in 1H10, more than one third were by American firms. It seems all that cash on U.S. corporate balance sheets that many bulls are hoping to fuel a cycle of investment domestically is leaving the country in search of higher growth and higher rates of return. Capital Chases Yield… globally. To affirm, international investors bought a net $1.35 billion of Brazilian domestic bonds in June, boosting their holdings to $13.5 billion in 1H10 – the most in three years.

 

The Brazilian Consumer: Capital Chases Yield - 1

 

Managing Risk

 

As always, our style of investing requires a prudent risk management approach that is duration agnostic. Given, we will continue to analyze and interpret the near-term risks to our long position in Brazilian equities. We don’t have to be bullish on the Brazilian consumer in perpetuity or at every price, so we’ll manage risk around market reaction to the Petrobras saga and the upcoming Presidential election.

 

Regarding Petrobras, recent reports suggest the company and the government remain split over the price of the oil reserves which will determine the size of the company’s upcoming share offering. As a refresher, the higher the price the government slaps on the oil, the more equity Petrobras will have to issue, creating further dilution of the share base. Market sources believe the government’s consultant priced the barrels at $10-12 per barrel vs. Petrobras’ consultant’s estimate of $5-6 per barrel. ANP, Brazil’s oil regulator sees a “reasonable” price for the oil somewhere in between, around $8 per barrel. The pricing disconnect has some investors worried that the share sale, which has a Sept. 30 target (three days before the election), could be delayed as far as 2011 on speculation that the elections and earnings season will force the issuing to take a back seat. Further uncertainty and speculation from here will continue to weigh on Petrobras’ stock price and, as a result, the Bovespa (Petrobras is Brazil’s second largest company by market cap).

 

With regard to the elections, it appears Lula endorsee Dilma Rousseff has taken a commanding lead. The latest IG poll shows Rousseff doubling her lead to 16 percentage points over opposition candidate Jose Serra. Support for Rousseff rose to 45% from 41% in the previous poll taken during July 17-20. Serra’s support fell to 29% from 33%, while Green Party candidate Marina Silva’s support was unchanged at 8%. A candidate needs more than 50% of the vote, excluding blank or invalid ballots, to win in the first round and the trajectory of Rousseff’s support suggest a victory for her in early October. The key takeaway here as it relates to the Brazilian economy is that former cabinet chief Rousseff is widely believed to be in support of big government spending, particularly when compared to the more austere Serra. Critics agree that her support is likely a function of her affiliation with current President Lula, whose social welfare programs and increased spending earlier in the year made him a very popular man amongst Brazilian voters. Investors fear that a Rousseff-led administration would bring about inflationary government spending and central government balance sheet deterioration, as her vow to cut taxes will likely force the government to fund any increases in spending via more debt issuance. This is all negative for the Brazilian private sector (and equities), as the need for higher interest rates to fight inflation and attract capital to public debt will keep a lid on private investment and credit expansion. Time will tell whether these fears are warranted.

 

For now, we are comfortable with our long position in Brazilian equities.

 

Darius Dale

Analyst


EARLY LOOK: Lover's Hour

 

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.

 

__________________________________________________

 

 

EARLY LOOK: Lover's Hour - Chart1

 

 

“Each moment of a happy lover’s hour is worth an age of dull and common life.”
-Aphra Behn

 


 
I love my family, my firm, and my macro model. There is no hiding love – especially after the lover’s hours we’ve had on the short side of the US stock market for the past few days and weeks. Winners love to win.
 
No, dear Bullish Sirs – this isn’t about slapping you in the face this morning. This is all about a man named Mucker showing you the love. The love of something that brutish men of markets could never understand – the love of a woman.
 
If Aphra Behn were to join the ranks of we who are wedded to our writings, I think she’d have sufficiently stirred the pot of conventional market wisdoms too. In the 17th century she became one of the first professional female writers in England. Per Wikipedia, “She has since become a favorite among sexually liberated women.”
 
Having been ball-and-chained to plenty a Wall Street trading desk in my day, the liberation associated by this great country’s freedom of speech has made me a very happy man. The love I have of seeing the conflicted and compromised walls of the Fiat Republic fall has no end.
 
Being Nemo in the fishbowl has its perks. I get fed a lot of emails. Most of the notes that people take the time to send me are very thoughtful and additive to my risk management process. Once in a while, I get sent something very special.
 
While the bullish brutes were running up the buy-and-hope score in July, an interesting player in this game made my day. He sent me a note that accused me of being married. He wrote, and I quote, that “you sound like a wife defending her husband."
 
Now, both on and off the ice, I have been called a lot of things in my day, but never a wife. If I could be someone’s wife, I would definitely be Laura’s.
 
Altogether, being wed to a view in this business can be as dangerous as being single minded. Being wed to a flexible, multi-factor, and multi-duration investment process is something I may forever wear as a badge of honor that some men in this business will love to hate. I’m cool with that though – I don’t foresee seeking the love of another man.
 
Let’s end this diatribe with what players in this game really feel. They hate being wrong. They love being right. For me, I have been happily wed to the bearish view since I put it on the tape on April 16th. Let’s get back to the positive messaging I am working hard on this week – winning and the love:
 
1.      Unemployment – yesterday’s jobless claims number was an absolute bomb. As my teammate Allison Kaptur summarized yesterday, initial jobless claims rose 12k last week to 500k, the highest level since November 2009. Consensus had called for a small decline.  Rolling claims rose 8k to 482.5k, also the highest level since last November.  We have been looking for the range of 375-400k as the maximum level for unemployment to fall meaningfully, but with claims moving the wrong direction, the spectre of rising unemployment looms.

 

2.      US Economic Growth – JP Morgan joined Goldman Sachs yesterday as the latest sell-side firm to cut their GDP estimates for the back half of 2011 closer to ours. As a reminder to all of those who are wedded to the bullish case that “earnings are good and US growth is good”, there is a very high likelihood that US GDP growth comes in at or below the Hedgeye estimate (established via my love letter dated July 1, 2010) of +1.7% for Q3.

 

3.      US Housing Double Dip – we fully realize that our current 2011 US GDP estimate of +1.7% doesn’t equate to what newsy pundits call a “double dip.” To be clear, we are calling for a significant sequential slowdown in US GDP growth over the course of the next 3-6 months and an acturial “double dip” in US Housing prices over the course of the next 6-12 months (our Q3 Macro Theme call for Housing Headwinds lays out the case for US Home Prices in the Case-Shiller series to drop -15-20% from the cycle-highs that are being established here in Q3).



Now what would my lover’s hour of watching the US futures trade lower again this morning be without giving my bullish friends both a line and a catalyst?

 

1.      The Line – the next line of immediate term TRADE support for the SP500 is 1058. Below that, the gravitational forces of chaos theory don’t signal any significant support for the SP500 until 1041. That line would register as a 3 standard-deviation move in our immediate term model and a very good spot to be covering shorts, buying some longs, and loving happy hour thereafter.

 

2.      The Catalyst – the next catalyst is starring us right in the eye on August 24th when the next bomb is dropped on the bulls barns via Twitter, Facebook, and email in the form of the US Existing Home Sales report.

 

As Oscar Wilde said, “the world has grown suspicious of anything that looks like a happily married life.” But the investment world as the Fiat Republic knows it is ending.

 

‘Tis Lover’s Hour in New Haven, CT. Stay transparent, my friends.

KM


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THE M3: GALAXY MACAU, CPI, GAMING TAX REVS

The Macau Metro Monitor, August 20th, 2010


RETHINKING GALAXY MACAU Intelligence Macau

IM is optimistic that Galaxy Macau will cater well to the mass and premium direct business.  Leading the premium-direct charge is Dennis Andreaci who brings a wealth of Asian experience from opening Sands Macau in 2004 and Venetian Macau in 2007.  Also, Galaxy will gain from being more like the Venetian than anyone else. The kind of people who visit the Venetian – more than half of all visitor arrivals – will be attracted to Galaxy Macau, too.  Additionally, IM thinks Galaxy Macau's grand entrance, superb interior and facilities, and Starworld's success stemming from its aggressive revenue-sharing policy with the junkets will be beneficial for the new Cotai facility.

 

CPI FOR JULY 2010 DSEC

The Composite CPI for July 2010 increased by 2.96% YoY (0.21% MoM).  The price index of Recreation & Culture rose by 2.61% MoM, attributable to higher charges for outbound package tours.

 

MACAU GAMING TAX REVENUES BOOST macaubusiness.com

Macau's budget surplus soared 75.5% YoY to MOP24.9 billion in the first seven months of 2010, with direct taxes from gaming (representing 84% of public finance revenue) increasing 63% YoY to MOP35.1 billion. 


R3: More Supply Chain Woes

R3: REQUIRED RETAIL READING

August 20, 2010

 

Another day with supply chain issues in the headlines, this time the Indian subcontinent in focus.  Other headlines include Taiwanese growth opportunities, a sweet spot for men’s suits, DKS, SPLS, and… Groupons???.

 

RESEARCH ANECDOTES

  

- Yesterday’s Groupon (if your not familiar Google it) proved so popular it took the site down. The group coupon website offered a deal for The Gap, which gave users $50 in spending power for the price of $25. At 50% off, we’re not surprised the demand was off the charts.

 

- Dick’s Sporting Goods expressed enthusiasm for an upcoming marketing push from Reebok aimed at re-energizing the toning category. Management continues the believe the “category has legs”. Not sure if the pun was intended.

 

- Dollar Tree noted that they are not seeing rising costs out of Asia on their merchandise, despite what other retailers are reporting. In fact, a recent buying trip to Asia resulted in a products with higher IMU’s and improved values for their customer. Management also noted that the company’s business model is not wedded to any specific items and as a result, leaves the company with more direct control of merchandise mix and margins.

 

- Staples noted that it expects back to school to be as promotional as in prior years. Management is pleased with the season so far, but cautions there are still several big weeks ahead in the BTS season.

 

 

OUR TAKE ON OVERNIGHT NEWS 

 

Supply Chain Crisis Looms - Fashion retailers and brands are facing a supply chain crisis as the Indian subcontinent grapples with a triple whammy of natural and man-made disasters and political unrest, which threatens to disrupt deliveries and heap further pressure on costs. The devastating floods in Pakistan have so far destroyed up to 30% of the country’s cotton crops after 700,000 acres of cropland was submerged. This has compounded a string of problems in the region, including the closure of the port of Mumbai in India last week and strike action over low wages at factories in Bangladesh. The result is uncertainty and volatility in terms of deliveries and a forced increase in freight costs to transport stock by different means, including air freight, to the UK and US. Vital overland and shipping routes in Pakistan were blocked soon after the floods started on July 31. Meanwhile, a container ship in the busy port of Mumbai shed its load after colliding with a steamer on August 7, bringing the crucial fashion transport hub to a halt. Both events are set against the backdrop of continuing riots at factories in Bangladesh, where between 10% and 20% of factories in the country have been closed while a new minimum wage threshold is thrashed out. The supply chain disruption could lead to retailers piling into Sri Lanka to pick up the shortfall. But sources said the country’s infrastructure could not cope with extra demand. <drapersonline.com>

Hedgeye Retail’s Take:  When it rains it pours.  Interestingly, many retailers that have reported 2Q so far appear to have had their early Fall shipments already in place or on the water.  Regardless, this should have both cost and inventory implications as the season unfolds.  Possible benefits for off-price as supply chain disruptions normally lead to opportunity. 

 

Consumer Seen Inching Toward Full-Price Stores - The on-again, off-again economic rebound has created a limbo of sorts for retailers, where those consumers who have held onto their jobs are still interested in low prices but are also looking for a bit more. The immediate beneficiaries now appear to include the large, well-funded giants that are stocking up on targeted and exclusive offerings. In contrast, off-pricers, which found themselves in vogue during the recession, continued to click along in the quarter, but their armor showed signs of cracking. <wwd.com/business-news>

Hedgeye Retail’s Take:  We’ve long maintained that off-price strength would eventually wane, but we think this has more to do with inventory in the marketplace vs. consumer tastes.

 

Specialty Retailers Show Weak Spots in Q2 - Thursday’s second-quarter results posted by specialty chains for the period ended July 31 were mixed. ARO management was not pleased with the sales and margin performance in the latter half of the period. BKE experienced a slight increase in the sale of marked down merchandise and an increase in loyalty card redemptions driving gross margins down. NWY fashion missteps and deep discounting widened its loss with additional pain from softness in T-shirts, dresses and shorts.<wwd.com/business-news>

Hedgeye Retail’s Take:  Rising inventories coupled with increased promotions=more risk over the rest of the year.  Teen retail is especially under pressure as ANF looks to sell through its 47% increase in inventories.

 

Taiwanese Retail is Bullish Due in Part to Chinese Tourists - Renewed confidence among Taiwanese consumers and ever increasing arrivals of deep-pocketed Chinese tourists is sparking a retail revival here. Department stores are riding the boom and at least eight major complexes are slated to open over the next two years. Consumer confidence is up in Taiwan and corporations are raising salaries slowly but steadily. Some industry experts expect the shopping boom to continue into the second half of the year. Even if sales by Taiwanese slacken, there could be an increase in sales from Chinese tourists if individual travel is allowed next year.  Taiwan currently requires Chinese tourists to join tour groups. Restrictions on tourists from the mainland were relaxed in July 2008, and this year 1.2 mm Chinese are expected to visit the island, displacing the Japanese as Taiwan’s top visitor group. Many Chinese come to Taiwan to shop for luxury goods. Prices are lower, mainly because Chinese shoppers can circumvent the luxury tax in their country. <wwd.com/retail-news>

Hedgeye Retail’s Take:  Not often on the radar map of many domestic players, it sounds like Taiwan may become a future growth opportunity.  With that said, China controls the spigot in terms of Chinese tourist visits, which makes this still a riskier market over time.

 

Facebook Goes Places - Facebook is hoping to crack the location market with its new offering called Places, a geolocation feature that enables Facebook’s 150 million mobile users to broadcast their location through their Facebook status windows via a smartphone. <internetretailer.com>

Hedgeye Retail’s Take:  Sounds like Foursquare was putting the heat on.

 

$500 Suit is the Sweet Spot for Men's Suit Market - With their popularity bolstered by the lingering recession, branded and private label offerings hovering in the $500 retail range are continuing to gain traction. “The $495 suit has become a meaningful price point,” said Jim Ammeen, president and chief executive officer of Neema Clothing Ltd. “We’ve definitely seen a large increase [at this price] over the past few years in both branded and private label merchandise,” said Ron Wurtzburger, president of Peerless Clothing International. Brands such as Calvin Klein, DKNY, Lauren by Ralph Lauren and Haspel — strong names in the consumer’s mind — are among those getting a boost during these tough times. The men’s suit market overall continues to feel the impact of the economic malaise that just won’t release its grip on the U.S. According to The NPD Group, overall suit sales in department stores dropped 10% in July 2010 compared with 2009 — and that was on top of a 24% decline in 2009 versus 2008. <wwd.com/markets-news>

Hedgeye Retail’s Take:  While $500 may be the bogey on price, it still seems like the economy is the bogey on demand.  The bottom line here is suits are likely to benefit from an improved employment picture.  Importantly, advancement in quality out of Asia will continue to be a key driver behind lower priced tailored clothing.

 

Mammut Sales Growth Slows in 1H - Sales growth has slowed considerably at Mammut Sports Group since April, according to first half financial data released Wednesday by its parent company Conzzeta Group of Zurich. Conzzeta said its Mammut Sports Group generated net sales in the first half of 2010 of 95 million Swiss francs ($87.9mm), up just 1.2% from CHF 93.9 million ($83.3mm) in the first half of 2009. <sportsonesource.com>

Hedgeye Retail’s Take:  We wonder if the slowing demand is weather related (after all it wasn’t just abnormally hot in the US) or something more specific with this high-end outdoor brand.  Domestically, there is no question that outerwear has been most impacted by record heat. 

  

New Technology Offers More Efficiency to Leather Industry - US-based software engineer Spartanics has launched a new product named Finecut Laser Die Cutting to help make the leather cutting process more efficient by using barcodes to automate job changeovers within seconds.  <fashionnetasia.com>

Hedgeye Retail’s Take:  Sounds like this may be an extension of technology already in use in the textile industry aimed at reducing waste and creating more precise seams. 

 

Levelwear to Launch Minor League Baseball Line - Levelwear, a brand division of The Accolade Group, recently signed a multi-year license agreement with Minor League Baseball (MiLBTM), to create a line of apparel that will showcase its patent-pending technologies - High Definition Lithography(HDL) and Level FX imagery. <sportsonesource.com>

Hedgeye Retail’s Take:  Expect the technology to allow for vivid photographic imagery screen printed on the apparel.  The manufacturer describes the product as “wearable art”.

 


Lover's Hour

“Each moment of a happy lover’s hour is worth an age of dull and common life.”

-Aphra Behn

 

I love my family, my firm, and my macro model. There is no hiding love – especially after the lover’s hours we’ve had on the short side of the US stock market for the past few days and weeks. Winners love to win.

 

No, dear Bullish Sirs – this isn’t about slapping you in the face this morning. This is all about a man named Mucker showing you the love. The love of something that brutish men of markets could never understand – the love of a woman.

 

If Aphra Behn were to join the ranks of we who are wedded to our writings, I think she’d have sufficiently stirred the pot of conventional market wisdoms too. In the 17th century she became one of the first professional female writers in England. Per Wikipedia, “She has since become a favorite among sexually liberated women.”

 

Having been ball-and-chained to plenty a Wall Street trading desk in my day, the liberation associated by this great country’s freedom of speech has made me a very happy man. The love I have of seeing the conflicted and compromised walls of the Fiat Republic fall has no end.

 

Being Nemo in the fishbowl has its perks. I get fed a lot of emails. Most of the notes that people take the time to send me are very thoughtful and additive to my risk management process. Once in a while, I get sent something very special.

 

While the bullish brutes were running up the buy-and-hope score in July, an interesting player in this game made my day. He sent me a note that accused me of being married. He wrote, and I quote, that “you sound like a wife defending her husband."

 

Now, both on and off the ice, I have been called a lot of things in my day, but never a wife. If I could be someone’s wife, I would definitely be Laura’s.

 

Altogether, being wed to a view in this business can be as dangerous as being single minded. Being wed to a flexible, multi-factor, and multi-duration investment process is something I may forever wear as a badge of honor that some men in this business will love to hate. I’m cool with that though – I don’t foresee seeking the love of another man.

 

Let’s end this diatribe with what players in this game really feel. They hate being wrong. They love being right. For me, I have been happily wed to the bearish view since I put it on the tape on April 16th. Let’s get back to the positive messaging I am working hard on this week – winning and the love:

  1. Unemployment – yesterday’s jobless claims number was an absolute bomb. As my teammate Allison Kaptur summarized yesterday, initial jobless claims rose 12k last week to 500k, the highest level since November 2009. Consensus had called for a small decline.  Rolling claims rose 8k to 482.5k, also the highest level since last November.  We have been looking for the range of 375-400k as the maximum level for unemployment to fall meaningfully, but with claims moving the wrong direction, the spectre of rising unemployment looms.
  2. US Economic Growth – JP Morgan joined Goldman Sachs yesterday as the latest sell-side firm to cut their GDP estimates for the back half of 2011 closer to ours. As a reminder to all of those who are wedded to the bullish case that “earnings are good and US growth is good”, there is a very high likelihood that US GDP growth comes in at or below the Hedgeye estimate (established via my love letter dated July 1, 2010) of +1.7% for Q3.
  3. US Housing Double Dip – we fully realize that our current 2011 US GDP estimate of +1.7% doesn’t equate to what newsy pundits call a “double dip.” To be clear, we are calling for a significant sequential slowdown in US GDP growth over the course of the next 3-6 months and an acturial “double dip” in US Housing prices over the course of the next 6-12 months (our Q3 Macro Theme call for Housing Headwinds lays out the case for US Home Prices in the Case-Shiller series to drop -15-20% from the cycle-highs that are being established here in Q3).

Now what would my lover’s hour of watching the US futures trade lower again this morning be without giving my bullish friends both a line and a catalyst?

  1. The Line – the next line of immediate term TRADE support for the SP500 is 1058. Below that, the gravitational forces of chaos theory don’t signal any significant support for the SP500 until 1041. That line would register as a 3 standard-deviation move in our immediate term model and a very good spot to be covering shorts, buying some longs, and loving happy hour thereafter.
  2. The Catalyst – the next catalyst is starring us right in the eye on August 24th when the next bomb is dropped on the bulls barns via Twitter, Facebook, and email in the form of the US Existing Home Sales report.

As Oscar Wilde said, “the world has grown suspicious of anything that looks like a happily married life.” But the investment world as the Fiat Republic knows it is ending.

 

‘Tis Lover’s Hour in New Haven, CT. Stay transparent, my friends.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Lover's Hour - bb1


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