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EARLY LOOK: Accept Uncertainty

This note was originally published at 8am this morning, September 7, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

 

 

EARLY LOOK: Accept Uncertainty - Van Gogh

 

 

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“For my part I know nothing with any certainty, but the sight of the stars makes me dream.”
-Vincent van Gogh
 
Back to the grind this morning. I’ll try to kick things into gear by keeping this tight. I’ll start where I always do, utilizing real-time market prices and the governing principles of chaos theory in our macro models. Managing risk in this increasingly interconnected global marketplace always starts with accepting uncertainty.
 
Chief of the Reserve Bank of Australia, Glenn Stevens, had this to say overnight as he kept Aussi rates unchanged at 4.5%:
 
“With growth in the near term likely to be close to trend, inflation close to target and with the global outlook remaining somewhat uncertain, the board judged this setting of monetary policy to be appropriate for the time being.”
 
Crisp, concise, and the to the point. To be sure, saying “somewhat uncertain” was pointed directly at Ben Bernanke who calls today’s global economy “unusually uncertain.” Altogether, global risk managers and central bankers alike should simply accept uncertainty in what it is that they do.
 
While I’m not certain about what it is exactly that Bernanke does in managing multi-factor and multi-duration global macro risk every day, I am certain about what it is that Congress does whenever they have an economic problem to solve for – spend.
 
Taking President Bush’s lead in increasing government spending, President Obama introduced another $50 BILLION in stimulus spending over the long weekend. This isn’t a political point – it’s a mathematical one. As you increase the numerator (spending) and the denominator continues to shrink (GDP), the ratio of US deficit/GDP goes up.
 
While there was some sort of sadistic fanfare associated with a 9.6% unemployment rate in this country being “better than expected” on Friday, we are going to look at the current intermediate term TRENDS in both US employment and consumption for what they are and we’re going to cut our US GDP growth estimate from 1.7% for Q3 to 1.3%.
 
What are the main macro signals in the US marketplace that continue to flash slowing growth?
 
1.      US Currency – the US Dollar was down last week for the 12th week of the last 14, losing another -1.1% of its uncertain value as the world’s reserve currency. Perhaps the President’s plans for additional stimulus leaked into week’s end. You tell me.

 

2.      US Bond Yields – after rising from its YTD lows last week, the interest rate on 10-year US Treasuries are falling again this morning back down to 2.65%. Notwithstanding that our intermediate term TREND line of resistance remains much higher (up at 3.01%), the reality here is that the bond market doesn’t lie about US GDP growth; politicians do.

 

3.      US Equities – after a big rally from oversold lows (we covered most of our short positions between August 24th and 25th walking through the math associated with the 1040 level being an important level to book gains on the short side), the SP500 remains bearish from an intermediate term TREND perspective. Our Bear Market Macro line in the sand remains 1144, and we have immediate term TRADE resistance at 1107.

 
This isn’t to say that there aren’t other countries, currencies, and commodities in this world that won’t do well in this uncertain macro marketplace (after being bearish on them for the first half of 2010, we are long Chinese equities via the CAF). This is simply an opportunity to recognize that there is nothing “unusual” about how currency, bond, and equity markets in the US are correlating.
 
What could change our view that US GDP growth is slowing?
 
1.      Weekly Jobless claims dropping, sustainably, below 390,000.

2.      Weekly MBA mortgage applications showing some semblance of a demand signal for US Housing (as opposed to the lowest levels of demand since 1997).

3.      Weekly price performance of US currency, US Treasury bonds, and US stocks changing their intermediate term TRENDS for at least 3 consecutive weeks.

 
What could change our call for American Austerity (Q3 Hedgeye Macro Theme)?
 
1.      Slowing US government spending

2.      Accelerating US GDP growth

 
Unfortunately, despite the “sight of the stars” of the northern lights last week, I am certain that I see neither government spending nor growth in America changing their respective bearish paths this morning.
 
Best of luck out there today,
KM
 
Keith R. McCullough
Chief Executive Officer

HEDGEYE RISK MANAGEMENT


QSR: EMPLOYMENT DATA POSITIVE ON THE MARGIN

Data from the Bureau of Labor Statistics today were positive, on the margin, for Quick Service restaurants.

 

Unemployment has been a thorn in the side of restaurant stocks but quick service restaurant chains have suffered more than most.  This is, of course, due to their heavy reliance on the younger age cohorts who have been impacted severely from this recession from an employment standpoint.   MCD, SONC, JACK, BKC, YUM, WEN and other quick service operators have mentioned high levels of unemployment (especially among young people) as being a primary impediment to same-store sales growth. 

 

The most recent data from the BLS indicates that those falling into the 20-24 years age group have seen a year-over-year uptick in employment levels for the first time since September 2007 when the Employment Level, on a seasonally adjusted basis, for 20-24 year olds grew by 0.22%.  MCD will still be making life hard for the other QSR chains, but this data point is a positive on the margin.

 

QSR: EMPLOYMENT DATA POSITIVE ON THE MARGIN - Employment by Age

 

Howard Penney

Managing Director


Bear Market Macro: SP500 Levels, Refreshed...

Not a lot has changed in the last few weeks. We stressed the oversold lows of the immediate term TRADE down at 1040 and have since recovered to yet another lower-intermediate-term high. Last week’s volume was anemic.

 

In the chart below we show that the Bear Market Macro line of intermediate term TREND resistance remains intact up at 1144 and we have another lower-high of resistance established at 1107.

 

If you are looking for good news, there is an immediate term TRADE line of support that’s developing in the 1086-1088 range. If you are looking for bad news, watch what happens to this market if that 1086-1088 range fails to hold on a closing basis (no support to 1028).

 

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bear Market Macro: SP500 Levels, Refreshed...  - S P


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R3: AMZN Coming on Strong

R3: REQUIRED RETAIL READING

September 7, 2010

 

Almost 14 months after the Amazon/Zappos deal was announced, we’re seeing some notable moves to strike brand exclusives and leverage both platforms. This is only the beginning. By the time this will be meaningful to AMZN’s P&L (which it ultimately will be), the impact on the footwear industry will be painful.  

 

 

OUR TAKE ON OVERNIGHT NEWS 

 

Heidi Klum and New Balance Launch Line on Amazon - The supermodel has teamed up with New Balance to design an activewear collection that will be sold exclusively on Amazon.com. The line, rendered in cotton and silk and dubbed Heidi Klum for New Balance, includes tunics, woven tops, leggings and outerwear. The collection will be available in a boutique on the Web site in the U.S., U.K., Germany and Japan on Oct. 7 and prices will range from $32 to $168. Klum was inspired by the increasingly busy lives of women, who she said want to be “stylish, comfortable and hip.” Along with an integrated viral component, print ads will begin running in November magazines. <wwd.com/retail-news>

Hedgeye Retail’s Take: This is relevant for a few reasons. 1) Heidi Klum sells. 2) New Balance has historically stayed far away from fashion-related endorsements. 3) NB has never done a major on-line exclusive. 4) On Sept 1, AMZN announced that Aldo would use Zappos as its exclusive on-line retail partner. And finally, 5) what do you notice about the photo below??? This is NOT a New Balance/Klum/ZAPPOS deal. It is an AMAZON deal.  We’re about  14 months into the Amazon/Zappos marriage, and we’re absolutely positively starting to see the lines blur between the brands, and the strategy to leverage both platforms move forward more aggressively. With an $800mm price tag, it’s about time. Keep your eye on this. It’s meaningful.

 

 R3: AMZN Coming on Strong - 1

 

July Golf Rounds Slide 5% - According to Golf Datatech, golf rounds played in the U.S. were down 5.1% in July compared to July 2009 and down 3.3% on a YTD basis. <sportsonesource.com>

Hedgeye Retail’s Take: I love hacking away on the course as much as the next guy, but this is yet another statistic showing that the sport simply does not grow. Keep in mind that last July and August it pretty much rained constantly. Weather compares are easy.  Golf is economically sensitive, but that is much more so on the hardgoods side of the business.

  

PSS and Fashion's Night Out - There’s a first time for everything. Payless ShoeSource guest designers Christian Siriano, Lela Rose, Patricia Field and Isabel Toledo will join forces for Fashion’s Night Out this Friday, marking their first joint appearance. Payless CEO LuAnn Via said shoppers can expect “pure energy, excitement and fun” as the designers show off their latest collections and mingle with customers at the Lexington Avenue store. “It’s always amazing how you can see the unique [personalities] come through in each label,” Via added. As for their differences, she described Rose’s designs as “classic with a twist,” Siriano’s as “edgy chic” and Toledo’s as “inventive with practical elegance.” <wwd.com/footwear-news>

Hedgeye Retail’s Take: I want to believe that this matters. And while it might, the reality is that the company needs to step back and really ask itself if ‘pure energy, excitement, and fun’ is something that the average shopper visiting its 4,800 stores really wants. 

 

Wal-Mart Finds Unsafe Practices at Factory of China Supplier of Appliances - Wal-Mart Stores Inc. , the world’s largest retailer, has found unsafe work practices in a mainland China factory operated by Elec-Tech International Co. , which supplies the chain with home appliances. <bloomberg.com>

Hedgeye Retail’s Take: Is it me, or is this like saying “I have uncovered some irresponsible practices at US investment banks.’?  This is a great way to do one of two things… 1) throw the public a bone by touting how social responsibility in China is important to WMT, and/or 2) giving a reason why there will be delays and changes to appliance deliveries.

 

TBL Advertising 3D - Timberland is putting its best foot forward in a new global campaign showcasing the Earthkeepers collection of eco-friendly apparel. The effort, dubbed "Nature Needs Heroes," includes TV, print and retail ads, as well as social media and a microsite that uses 3D technology to help consumers become better acquainted with Earthkeepers. The site allows users to examine a frozen moment on screen at a 360-degree angle. In the past, Timberland focused on traditional elements like TV and print, said Jim Davey, Timberland's vp of global marketing. "This is the first time we've reflected new media realities with additional elements like 3D microsites and interactive windows in our retail stores," he said. Furthermore, Timberland aims to drive its eco-friendly message home through TV and print ads. <brandweek.com>

Hedgeye Retail’s Take: Not exactly revolutionary, but notable enough for a brand that been unable to grow for the better part of 5-years.

 

Ohio to L.L. Bean: Pay Up - In a case being watched by other states, Ohio wants $210,000 in back taxes under the state’s commercial activity tax law. L.L. Bean is seeking the shelter of a U.S. Supreme Court ruling on state sales taxes, but Ohio says that ruling doesn’t apply. <internetretailer.com>

Hedgeye Retail’s Take: This one is actually quite interesting, as it is yet another  example of a state that is looking for ways to get paid by Consumer-Direct models that are otherwise taking share from bricks and mortar.

 

Specialty Stores Cut Jobs - August employment figures pointed to a long slog to full economic recovery, as specialty retailers cut positions while department stores added a handful of jobs and the overall unemployment rate rose slightly. Specialty store retailers eliminated 1,200 jobs last month to employ 1.39 mm, while department stores added 300 positions to employ 1.49 mm. General merchandise stores, which include department stores, eliminated 4,700 positions to employ 2.95 million, the Labor Department said. The private sector “continued to trend up modestly,” adding 67,000 jobs in August, according to the Labor Department, the eighth straight month it has done so. <wwd.com/business-news>

Hedgeye Retail’s Take: Check out those general merchandise/department store numbers…

 

Vietnam: Leather and Shoe Export in August Increases by 19% - Vietnam’s leather and shoe export turnover in August continued maintaining high growth rate at of 19% year-on-year. Increases were driven by the export of handbags, wallets, suitcases and umbrellas. The association predicted that in the rest four months, Vietnam’s leather and shoe sector may not only fulfill the targeted export turnover of $4.6 bn, but can reach over $5 bn.  <fashionnetasia.com>

Hedgeye Retail’s Take: Yes, yes and yes. With the yuan floating, other non-Japan Asian countries will absolutely take share as they arb price spreads between local vs. Chinese production. It’s vital to keep these numbers in context, and not get sucked into thinking that big numbers reported by Vietnam, Indonesia, Malaysia, and Thailand are representative  of the industry at large. That’d be overstating economic reality.

 

British Retail Sales Up But Not Strong - UK retail sales values were up 1.0% on a like-for-like basis from August 2009, when sales had fallen 0.1%. On a total basis, sales were up 2.8% against a 2.2% increase in August 2009. Food sales growth slowed a little. Clothing and footwear sales strengthened, helped by new autumn/winter ranges and back-to-school. Homewares edged up but sales were still often deal-driven, with big-ticket items affected by consumer uncertainty over job cuts and income prospects. Non-food non-store sales (internet, mail-order and phone sales) picked up in August and were 17.8% higher than a year ago, but this was against an exceptionally weak 8% gain in August 2009. <brc.org.uk>
Hedgeye Retail’s Take: British comp sales grew 1% for August but slowed on the 2 year and 3 year to 0.5% and 0% respectively. British and US comps look the same with the underlying trend showing that sales are flat and moving sideways. 

 

 R3: AMZN Coming on Strong - 2


THE M3: SJM INTERESTED IN SITES 7&8; GALAXY

The Macau Metro Monitor, September 7th 2010

 

SJM COVETS SANDS'S LAND WSJ

SJM CEO Ambrose So said his company is interested in sites 7 & 8, which Sands China has already invested $102.3 MM.  Sands China acting CEO Mike Leven said Sands "certainly will defend (its) positions on sites 7 & 8" and that historically when the government has allowed operators to invest in land, they've eventually gotten the rights to it.  However, recently, the government warned that undeveloped land on Cotai may be taken back.

 

So added that he expects land ownership rights will be granted for SJM, Wynn Macau and MGM Macau by the end of this year.  SJM, which has registered names of certain James Bond characters for its new casino project, will build in stages and will talk to its neighbor (the Venetian if it gets sites 7 and 8 or Wynn if it is stuck with its original land claim, which is not viewed as a prime spot) to attempt to increase connectivity between the casinos, said So.  Unlike the crowded peninsula, Cotai casinos are more spread out.  So also forecasts 40-45% growth in GGR for 2010 and brushed away concerns of a slowdown in capital flow from China.  "The (Chinese) government is pumping out more money," he said.


SJM EYES 7&8, MSC, HELLO KITTY, THE PEARL, ETC, ETC IM

IM thinks SJM has better options than sites 7 & 8.  According to IM, Macao Studio City is a much better site and SJM has already drawn up detailed plans for a casino called The Pearl, which is situated the northwest corner of the MSC site.  If MSC loses its right to run a casino, SJM can still put up a casino in the northwest corner.

 

SJM's other promising site on Cotai sits to the east of the strip, bridging the gap between Wynn's site and the site known as Hello Kitty, which will supposedly be developed under the SJM license.  Also, the light rail will run down that side of the strip.

 

GALAXY NO FEAR OF SINGAPORE The Standard

Vice Chairman Francis Liu said,  "Macau aims to lure customers from Greater China, while Singapore targets Southeast Asians.  Carving out market share is not our main target. Profit growth is more important. But our new resort hotel [Galaxy Macau] may help us increase market share and be our profit driver."


WEEKLY RISK MONITOR FOR FINANCIALS: MORE GOOD THAN BAD, BUT WATCH GREECE

Greek Yields A Harbinger of Things to Come?

Last week, 5 of the 8 risk measures we track registered positive readings on a week-over-week basis, while two were negative and one was neutral. An growing risk worth noting is Greece. As we highlight below, Greek 10-Year Bond Yields (the measure we track) are nearing their all time highs set before the EU bailout announcement. This may be a harbinger of a revisit of the Sovereign debt crisis from April through June of this year. As such, we would advise investors to keep close track of this metric going forward, as a break to new highs in the underlying (CDS is already at new highs) could snowball. Remember, it was the breakdown in Greece that triggered the global risk-off trade just a few months ago.

 

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

 

WEEKLY RISK MONITOR FOR FINANCIALS: MORE GOOD THAN BAD, BUT WATCH GREECE - summary

 

1. US Financials CDS Monitor – Swaps were mostly positive last week.  Swaps widened for just 3 of the 29 reference entities, while 26 tightened.    Conclusion: Positive.

 

Widened the most vs last week: SLM, MTG, AGO

Tightened the most vs last week: C, GS, AXP

Widened the most vs last month: BAC, WFC, SLM

Tightened the most vs last month: UNM, CB, GS

 

WEEKLY RISK MONITOR FOR FINANCIALS: MORE GOOD THAN BAD, BUT WATCH GREECE - us cds

 

2. EU Financials CDS Monitor – In Europe, swaps for 36 of the 39 reference entities tightened and 4 widened.   Conclusion: Positive.

 

Widened the most vs last week:  IKB Deutsche Industriebank, DnB NOR, Nordea Bank

Tightened the most vs last week: Hannover Rueckversicherungs, Intesa Sanpaolo, HSBC Holdings

Widened the most vs last month: Bank of Ireland, Assicurazioni Generali, KBC Group

Tightened the most vs last month: UBS AG, HSBC, HBOS

 

WEEKLY RISK MONITOR FOR FINANCIALS: MORE GOOD THAN BAD, BUT WATCH GREECE - euro cds

 

3. High Yield (YTM) Monitor – High Yield rates rose 11 bps last week. Conclusion: Negative.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MORE GOOD THAN BAD, BUT WATCH GREECE - high yield

 

4. Leveraged Loan Index Monitor – The leveraged loan index rose 4 points last week.  Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MORE GOOD THAN BAD, BUT WATCH GREECE - lev loan

 

5. TED Spread Monitor – Last week the TED spread rose for the first time in two months, closing at 17 bps versus 16 bps the prior week. Conclusion: Negative.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MORE GOOD THAN BAD, BUT WATCH GREECE - ted spread

 

6. Journal of Commerce Commodity Price Index – Last week, the index rose 5 points, closing at 14.45. Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MORE GOOD THAN BAD, BUT WATCH GREECE - joc

 

7. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields fell 13 bps, ending the week at 1132 bps versus 1145 bps the prior week.  However, trading yesterday reversed this positive move, with spreads rising again to 1148 bps. Conclusion: Neutral. 

 

WEEKLY RISK MONITOR FOR FINANCIALS: MORE GOOD THAN BAD, BUT WATCH GREECE - greek bonds

 

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 218 versus 225 the prior week.  Conclusion: Positive.

 

WEEKLY RISK MONITOR FOR FINANCIALS: MORE GOOD THAN BAD, BUT WATCH GREECE - markit

 

Joshua Steiner, CFA

 

Allison Kaptur


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