The Grind: What's In My Notebook

Another day, another grind…


Here are the bullish/bearish DATA and PRICE moves in my notebook from the last 48 hours.



  1. SP500 continues to hold its immediate term TRADE line of support = 1111
  2. The range in our 3-day probability model for the SP500 continues to tighten (46 points now)
  3. All 9 sectors in our SP500 TRADE/TREND model continue to flash bullish TRADE, confirming the index signal
  4. India raised rates by 25bps to 6%, making its 5th hike of 2010, and the BSE Sensex continued to make higher-highs
  5. Chile raised rates by 50bps to 2.5% on inflation concerns (yes, they are real) and Chilean equities are +32% YTD
  6. FTSE and DAX continue to flash bullish TRADE and TREND
  7. Netherlands reported a better than expected unemployment rate of 5.3% (down 20bps m/m) and now that stock market is bullish TRADE/TREND
  8. Russian and Norwegian stock markets have recovered their bullish intermediate term TREND lines (bullish oil signal)
  9. Both the Euro and British Pound (were long FXB) are back to bullish TRADE and TREND relative to the USD
  10. Both Brazil and Canada continue to trade bullish on both TRADE and TREND durations
  11. Commodity prices continue to be in a Bullish Formation (bullish across all 3 of our core investment durations: TRADE, TREND, and TAIL)
  12. CRB Index and soft/agricultural immediate term TRADE correlations (inverse) continue to be north of .80 across the board
  13. Gold prices continue to make higher-highs and higher lows (fear of US Congress and Japanese Bureaucrats trade)
  14. The Yield Spread (10s minus 2s) has expanded week/week by 8 basis points; bullish immediate term TRADE signal for financials
  15. US CPI and PPI inflation reports came in very much benign for august, support the storytellers at the Fed who never will see inflation
  16. Texas Instruments (TXN) buyback of $7.5B was a beast, stoking the “cash on corporate balance sheet” bull case that we heard in 2007
  17. Spanish Debt sales were both longer duration (30yr) and lower yield (5.07% vs. 5.9% last) than prior auctions


  1. SP500 continues to flash bearish from an intermediate term TREND perspective = 1144 resistance
  2. Volatility (VIX) is holding its 21-22 level of intermediate term support = sell signal
  3. US stock market breadth has deteriorated this week = 1st week it has done that in the last 3
  4. US Dollar continues to be a train wreck: down -1.8% w/w and down 13 of the last 16 weeks
  5. Short term US Treasury Yields (2s) have broken their immediate term TRADE line of support again of 0.52% = bearish US GDP signal
  6. Philly Fed survey -0.7 was another miss
  7. University of Michigan Consumer confidence drops to 66.6 here in September (from 68.9 in AUG) despite low-volume stock market strength
  8. Waxman, Weiner, Schumer all picking up the government intervention/fear-mongering from gold to china = bearish US Dollar and bond yield factor
  9. UBS comes out with their super duper “idea” list of “39 Potential M&A candidates” this week; smacks of 2007 sellside hope
  10. Chinese equities closed down for the final 3 days of the week; still bullish TREND, but bearish immediate term TRADE is as bearish does
  11. China is a “manipulator” rhetoric really turning up the volume on anti-Congress commentary in Asian publications
  12. Japanese Yen has finally broken its immediate term TRADE line of support and looks to have locked in a 3-6 month high in the rear-view
  13. Pakistan showing some equity weakness into week’s end; geopolitical risk? its certainly being priced into commodity inflation
  14. Greece continues to act like the dog of dogs after breaking critical TREND line of support at 1575 on the ATG Index (down -29% YTD)
  15. UK Retail Sales dropped sequentially to +0.4% (AUG) vs +1.0% (JUL)

On balance, still more immediate term bullish than bearish DATA and PRICE moves in my notebook and I guess that explains partly why I have the longest invested position I’ve had in our Hedgeye Asset Allocation Model in months (cash position has dropped from a peak of 79% to 46% today), but I’m getting very nervous about holding my longs here (13 LONGS, 10 SHORTS). Congress scares the hell out of me.


Enjoy your weekend,



The Grind: What's In My Notebook - The Grind


The Macau Metro Monitor, September 17th 2010



Despite a recent change in the land agreement, CoD cannot sell the rooms individually in its apartment hotel, said the Land, Public Works and Transport Bureau (DSSOPT).  The Secretary for Transport and Public Works issued a land revision allowing the property to increase the construction areas of its five-star hotel and a four-star apartment hotel by 42 percent and 32 percent respectively.


According to the DSSOPT,  the land concessionaire adjusted the investment strategy in response to the local market’s development, and therefore increased the area of part of its five-star hotels.  The decision to change the five-start apartment hotel to four-star  was to make the development project meet the demand of different types of customers, added DSSOPT.  In addition, DSSOPT reiterated that the land parcel could not be transferred to another party without the approval of the Government.



Total MICE group hotel bookings grew by 42% YoY in the first half of 2010, “with no sign of slowing down this year and into 2011,” says Sands China.  A total of 33 trade shows have been confirmed for 2010, up 22% since 2008.  The company says it is seeing a particularly strong growth in emerging markets with group business from India up 63% from 2009 and China up 72%.



Secretary Tam continues to expect GGR growth of 30% for 2010.  Mr. Tam said he believed the growth of the gaming revenue in the fourth quarter of 2010 would be slower since the comparison basis is higher.



According to Michael Lam Soi-hoi, a transport infrastructure consultant with the city's government, Macau will spend US$1 BN to build a light railway by 2014 and continue expansion thereafter.  The US$1 billion would be spent on Phase I of the plan, which comprised two light rail lines and would start operation in 2014, Lam said.

R3: GIII, M, HLYS, LVMH, and SocialSmack


September 17, 2010


The real-time feedback loop continues to grow for consumer brands as social media sites such as SocialSmack solicit instant feedback on a brand’s worthiness.  There’s no hiding anymore if your product or customer service isn’t up to par. 




- Keep an eye on a new social media site called SocialSmack. The site is partially an information network, a consumer review site, and part game.  The goal is to allow users to give “props” or “drops” to specific brands as well as connect them to other SocialSmackers.  Yet another reason for companies to focus on their customer now that they are about to have a real-time report card.


- The combination of two old-school off-pricers is  finally a reality with the opening of Fb Sy on the Upper West Side in Manhattan.  Yes, that is the horrible new name for the Filene’s Basement/Syms combo.  Within the store, Syms remains the brand of choice for men’s while everything else is marketed under Filene’s Basement.  Seems like management is torn between choosing sides on this one.


- Several changes among fashion brands took place this year in Interbrand’s annual ranking of the top 100 global brands.  Louis Vuitton remains the highest ranked fashion brand on the list, logging in at number 16 overall.  H&M (#21), Nike (#25), Gucci (#44), and Zara (#48) were all in the top 50.  Other ranked brands included Adidas, Hermès, Gap, Armani and Burberry.  Dropping off the global 100 were Ralph Lauren, Prada, and Puma. 





GIII and The Camuto Group Form JV to Open and Operate Footwear and Accessories Outlet Stores - The goal is to open units in the first half of next year. Privately held Camuto Group, founded in 2001, will supply merchandise, and G-III will provide the infrastructure for the new concept. Brands in Camuto’s portfolio include Vince Camuto, Jessica Simpson, BCBG Max Azria, BCBGeneration, Kensiegirl, Lucky Brand and Arturo Chiang, among others. G-III is a publicly held manufacturer of outerwear and women’s sportswear and also operates retail outlet stores under the Wilsons Leather nameplate. <>

Hedgeye Retail’s Take: Interesting combo here given that GIII is providing infrastructure for a footwear business in which it really has little expertise.  Perhaps this is really more of a play on leveraging Wilson’s retail infrastructure given Wilson’s is not one of the bright spots in the GIII portfolio.


Heelys Rolling into China - Heelys Inc. announced on Wednesday it had hired Tokyo-based Japan-Asia Strategies and its owner, Thomas Seymour, to build the footwear firm's business in Asia. According to the company, Seymour will work closely with Heelys VP of international John O’Neil to evaluate market opportunities for the brand. <>

Hedgeye Retail’s Take:  When all else fails, head to China.  We can just see the company presentations now highlighting the number of children’s feet in just Shanghai alone. 


Jimmy Choo To Reopen Retail Locations - After extensive renovations to bring its stores in line with its global design concept, Jimmy Choo has reopened three locations. The stores — at South Coast Plaza in Costa Mesa, Calif.; The Mall at Short Hills in Short Hills, N.J.; and Highland Park Village in Dallas — each feature design elements of a 1940s boutique and showcase the full range of Jimmy Choo shoes, handbags, small leather goods and sunglasses. CEO Joshua Schulman noted that the stores needed to be updated to fully reflect the broader product range that the company now offers.  <>

Hedgeye Retail’s Take:  Good timing as the company is rumored to be for sale.  The stores will be key to transforming the brand beyond shoes into a “lifestyle” brand. 


Macy’s Prepares For More Online Growth - The retailer will expand a Tennessee fulfillment center to support its growing online sales. Macy’s says web sales for the first half of 2010 increased 31%.  <>

Hedgeye Retail’s Take:  No surprise here as this allows M to further expand is SKU count online as well as offer improved service.  E-com remains one the single biggest capital uses across the broadline space.


Lord & Taylor to Expand For First Time in A Decade - Sources said the retailer is seeking a second location in Westchester County, N.Y., largely based on the success of its Scarsdale branch in Westchester. That unit is the chain’s best-performing branch store. It is said to generate between $90 million and $100 million in annual sales, ranking second in volume behind L&T’s Fifth Avenue flagship. The retail chain owns the 180,000-square-foot Scarsdale location, both land and building. However, a source noted it can not be expanded. The last time L&T opened a store was in 2000. <>

Hedgeye Retail’s Take:  Something is clearly working for the private equity parents to invest in L&T’s first store in 10 years!  Or, a growth story makes for an easier sale/IPO.  Either way, clearly L&T is finding its niche again and exploiting it in the market where it likely has the highest brand awareness and customer loyalty.


LVMH's Hublot Plans to Double Asian Stores on China Luxury Boom - Hublot , the Swiss watch brand that timed the World Cup, plans to more than double store numbers in Asia, driven by Chief Executive Officer Jean-Claude Biver ’s conviction that China offers at least 30 years of growth.  <>

Hedgeye Retail’s Take:  Heely’s and Hublot’s in the same day. Now that’s a combo. 


Eve May Raise $445 Million Selling Shares to Finance China Menswear Shops - Eve Enterprise Group , the Chinese luxury menswear chain, plans to raise about 3 billion yuan ($446 million) selling shares to fund store openings as rising incomes fuel demand for tailored clothing. <>

Hedgeye Retail’s Take:  Recall that Chinese consumption is not just fueling demand for Western Brands.  Local incumbents are turning up the competitive heat and are well capitalized.  Eve might just put a damper in Men’s Wearhouse’s  China plans.


More Studies Showing Retail Hiring Increases for Holiday - Retailers are more optimistic about revenue growth and are even planning to hire additional workers this holiday season as they recover from the prudence that’s dominated their thinking since the market disruptions of 2008. Those are the key takeaways from two studies, one from CIT Group Inc., surveying middle-market retailers, suppliers, and manufacturers; and the other from management consultancy Hay Group Inc. exploring the seasonal hiring intentions and sales and promotional expectations of 20 major retailers, including JCP and ANF. According to the CIT study, 68% of retailers expect to hire more workers this holiday season than they did for holiday 2009. And while 72% said they expect to discount more this year than a year ago. In the Hay Group study, 83% of the retailers said they plan to hire more or the same number of workers for the season, with 61% hiring about the same and 22% employing anywhere from 5 to 15% more to meet their holiday needs. <>

Hedgeye Retail’s Take:   While the promotional activity expectations are hardly surprising, we are a bit surprised to see that hiring will be up across most retail chains.  Perhaps this is more a result of understaffing last year than a true bullishness surrounding this 4Q.  Additionally, we would expect e-commerce to remain robust which in theory should also allow for more conservative staffing for those with multi-channel operations.


BFC: Fashion Worth 20 bn Pounds to UK Economy - The direct value of the fashion industry to the British economy is nearly 21 billion pounds according to a study released on the eve of London Fashion Week. The "Value of the UK Fashion Industry" report, commissioned by the British Fashion Council (BFC), defines the industry and analyses the economic value of Britain's fashion industry for the first time, the BFC said in a statement with the report's release. It said that fashion's wider contribution to the economy in influencing spending in other industries, ranging from IT to tourism, was calculated as more than 16 billion pounds. "This means that, including direct, indirect, induced and 'spill over' effects, the fashion industry's total contribution to the UK economy is estimated to stand at more than 37 billion pounds," the report said. <>

Hedgeye Retail’s Take:   Translation:  The UK is giving NYC a run for is money as a key fashion center and this is likely to continue.


EU Leaders Agree to Give Pakistan Increased Market Access - European Union leaders agreed on Thursday to give Pakistan increased market access through a “time-limited” reduction in tariffs on key product categories as part of a support package to help the country recover from the summer’s devastating floods. The pending agreement would involve suspending tariffs on about a dozen major textile and apparel products from Pakistan worth about 231mm euros, or $300mm, annually. Key Pakistani textile exports, including cotton yarn and fabrics, are among the products being examined, EU diplomats said. EU leaders also agreed Thursday to seek to make Pakistan eligible for GSP Plus trade status by 2014. <>

Hedgeye Retail’s Take:  Despite the tariff reductions, it will still take some time before commodity and textile production re-accelerates from the post-flood devastation. 


India: Textiles Ministry to Revive TUF Scheme in 3 Months - India’s textiles ministry has decided to reintroduce the Technology Upgradation Fund (TUF) scheme, under which the government will subsidize a portion of interest on loans, exchange rate fluctuations and capital equipment on a case-to-case basis, in the next two to three months. <>

Hedgeye Retail’s Take:  Government subsidized technology upgrades are just another step in India becoming an even bigger player in the textiles industry as it looks to offer a viable alternative to Chinese production.




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The resignation of CFO Chuck Sonsteby was surprising to me but it does not spell disaster for Brinker.


Last night, news of Sonsteby’s departure hit the tape.  While I expected him to stay at the company for a few more years, his leaving for Michaels Stores probably offers him some significant monetary upside – particularly if he gets cheap equity and leads the charge on an initial public offering of the private company.  Furthermore, the Bar & Grill industry is a difficult area in this current environment, and while the operational initiatives at Chili’s will generate rewards for the company, Michaels Stores may have provided a more appealing experience (with a possible big IPO payday).


While I am yet to speak with anyone at the company, I do not think this implies any major issues within Brinker.  If anything, it may shorten the odds of a take-out – something I did not think was likely prior to Sonsteby’s resignation.  I will follow up with further details shortly.


EAT: UNEXPECTED DEPARTURE - chuck share price


Howard Penney

Managing Director


Here are our brief thoughts heading into Tuesday along with some recent management commentary.



WMS will hold an Analyst Day on Tuesday of next week and while we don’t expect a ton of new information to be divulged, the tone should be positive.  Management should provide an upbeat assessment of the long term potential of worldwide slot demand while also remaining cautious regarding the near-term replacement environment.  We also expect management to successfully address cash flow issues including the ramp up in capital spend related to Italy among other things, and the accelerated R&D. 


For FQ1, we are pretty much in-line with the Street.  Some additional thoughts:

  • The quarter should follow normal seasonality patterns.  North American (NA) replacements are expected to be weaker sequentially - we’re estimating about 10,000 total replacement units for the industry
  • New units to NA should be flattish with last quarter
    • WMS's shipment to Sugarhouse was accounted for in the June quarter
    • Big shipments for the September quarter include:
      • Cosmo – 23% of the floor
      • Penn Cecil County – 29% of the floor
      • Some expansion units into California tribes
    • EPS of $0.37 is in-line with the Street while our $2.02 FY2011 estimate is slightly below the Street.  However, replacement demand could accelerate at any time, particularly if casinos respond to upcoming Government tax incentives.



  • “The early performance from the initial xDs and the overall feedback from operators across a diverse spectrum of casinos in various geographic markets is exceptional. The initial demand for xD is both gratifying and highly encouraging for our long-term success. In spite of the overall restrained capital spending environment, the strong initial backlog for Bluebird xDs is providing solid visibility just out of 2011 and supports WMS’s expectation of continued ship share gains and revenue growth in coming quarters.”
  • “We did fall a bit short of our target for launching this product at a comparable gross margin to the Bluebird2, our team is squarely focused on the various improvements we need to make to close the gap.”
  • “While we have modest expectations for unit volumes for Helios, it does open up certain markets where WMS did not previously have a presence and also offers opportunities to gain a foothold in these untapped markets and begin to build incremental growth”
  • “I think LORD OF THE RINGS has had an extraordinary start, I think we’ve got about 150 of them out in the field so far and we expect to have several hundred more this quarter. But the comments thus far have been very positive, that the win per day that we’re getting from our operator partners is indicating that it’s not quite WIZARD OF OZ type numbers but not far off either.”
  • xD premium to Bluebird pricing: “A little higher than that, probably 25%.”
  • “Penn National’s New Hollywood Casino in Cecil County, Maryland, we achieved a 29% floor share”
    • This amounts to 435 units shipping in the September quarter
  • “In fiscal 2011, we expect to spend an incremental $9 to $11 million or an equivalent to about 0.10 to $0.12 per diluted share on internal R&D activities over and above a normal annual increase in such as expenditures. We also plan to deploy about $40 million of incremental capital to expand our high return gaming operations business to address the growth opportunities in the Italy VLT sector, the pursuit of attractive operating leasing arrangements from customers globally and the ongoing conversion of our installed base participation games to the Bluebird2 platform.”
  • “WMS has specific product initiatives and operating strategies that provide the basis behind our revenue targets for fiscal 2011:
    • 3 to 7% growth in unit volume
    • 1 to 4% increase in average selling price in our product sales business
    • 4 to 6% growth in our installed participation base
    • 1 to 3% increase in average daily revenues in our gaming operations business”
  • “We expect that replacement sales in the U.S. and Canada will only improve modestly in calendar 2011 over calendar 2010, similar to the low single digit growth we’ve seen in calendar 2010 over calendar 2009.”
  • “Key revenue growth drivers are:
    • Ongoing share penetration and new unit shipment growth for new markets…
    • Modest improvement in Class II and central determinant jurisdictions, which today are primarily tribal casinos in Washington State and around the U.S…
    • Continue the ongoing ramp up in Mexico and Australia due to the strong player appeal and high earnings performance from the initial sales in fiscal 2010
    • We estimate that these three markets -- Washington, Mexico, and New South Wales, Australia -- in aggregate have an addressable market of over 250,000 units longer term.”
  • “In mid fiscal 2010, we also expect to deploy capital for our first VLT units to be leased in Italy.  We are close to concluding our discussions related to our first agreement with one of the concessionaires for VLT licenses in Italy and are presently in negotiations with additional concessionaires. These units will be leased gaming machines that earn WMS a daily revenue rate over a nine-year lease term. Revenues from these placements will be included in other gaming operations revenues. These lease units will not be included in the average installed participation base nor in the calculation of the average revenue per day per participation machine as they are not participation games.”
  • “In fiscal 2011, we also expect to earn initial revenues from both the launch of network gaming applications and our online casino site in the United Kingdom. We have three of the nine beta test sites of our WAGE-NET system and the Jackpot Explosion portal application running at this time. we continue to expect that these tests will conclude in the December quarter and that we would begin to earn our first network gaming application revenues at that time.
    • That adding our Jackpot Explosion portal application increased coin in by over 20% over the same game themes at those sites that do not have the portal application running.
    • We expect to launch our Jackpot Party online gaming site in the December quarter for U.K. residents. This site will contain a variety of familiar WMS games including THE WIZARD OF OZ and Star Trek, along with some traditional casino games and unique play features not seen before in the online gaming world.
    • We expect revenue contributions from both of these businesses will be very modest in fiscal 2011 but in both cases they will represent incremental revenues over fiscal 2010.”
  • “FY2011 …our expectation of 8-11% revenue growth …translates into annual revenue range of 830 million to 850 million"
  • “Our first quarter revenue guidance of 174 to 179 million represents five to 8% growth over the September 2009 quarter”
  • “In fiscal 2011, we anticipate …further improvement in operating margin, which we anticipate in the 22.5 to 23% range for the full year.”
  • “In fiscal 2011, we expect the product sales gross margin to range from 52 to 55% as our continuous improvement programs and benefits from higher volumes are expected to offset lower initial start-up margins on some new products and some new distribution channels. However I would note that in the fiscal first quarter, due to the low seasonality of revenues and the initial impact from the start-up and full commercial launch of the Bluebird xD with its new complex supply chain, we expect a sequential and year-over-year decline in the product sales margin, which when coupled with our higher R&D spend will lead to a year-over-year decline in our operating margin to 17.5 to 18% for the first quarter.”
  • “In our gaming operations business, we expect to sustain our gross margin during the year within a range of 79 to 81% while continuing to reflect the variability of jackpot expense experience and a mild dampening effect of having a higher percentage of WAP units in our installed base.”
  • “We expect R&D expenses to increase to around 15% of revenue in fiscal 2011.”
  • “While the dollar amount of spending on these initiatives will continue to increase, we expect the increase to be less than the rate of growth in revenue and thus expect that selling and administrative expenses will be lower as a percentage of revenues in fiscal 2011 than in fiscal 2010.”
  • “With the anticipated increase in gaming operations capital spend in fiscal 2011 and launching into new businesses, we do expect depreciation expense to begin to increase this year.”
  • “Absent legislative action to restore the R&D tax credit, we believe our effective tax rate will be in the range of 36 to 37% for fiscal 2011”
  • “Of our North American units this year we could ship as many as 25 to 30% of our unit shipments for the year could be XD.”
  • “Typically we sell a third of our products internationally from box sales. Q4 was a little bit of an uptick, we got to 40%, which is a record….I think it’s more in line of the 33 to 35% range is what I would suggest for modeling purposes this year.”
  • “As it relates to Illinois, I would view that to be a second half of the year event for WMS. I would think probably sometime in the probably February, March timeframe, you’ll see some initial placements and then you will see Q4 probably ramp up from there. We don’t see it as a significant opportunity in our fiscal ‘11, it’s probably going to be more so in fiscal ‘12, but we will have a few units in there, and that’s baked into the guidance that we gave today.”

CHART: US Dollar Index vs. Food Stamp...

According to the US Census Bureau, there were 43.6 MILLION Americans living in poverty in 2009 and the latest reading on Americans who live off of food stamps is about that same number (which is at a 15 year high).



CHART: US Dollar Index vs. Food Stamp... - chart1



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