Comping The Comp - Athletic Trends Robust

As a follow up to last week’s athletic trend update, sales accelerated again this week a trailing 3-week basis in athletic footwear and apparel as well as at retail according to ICSC weekly retail sales. Perhaps most noteworthy is the growth in athletic footwear up +8.3% on a trailing 3-week basis despite facing materially more difficult compares (+3.7%). Importantly, this growth came on higher ASPs suggesting new product flow is starting to gain traction. Recall that next week marks the last tough comp (+4.8%) before footwear has the wind at its back with considerably more favorable compares over the next 2-months until holiday sales in December. In addition, all three channels were strong with discount/mass going positive for the first time in nearly a year. As a result, we expect the athletic space and athletic footwear in particular to outpace overall retail and continue to be a preferred subsector within retail.


Comping The Comp - Athletic Trends Robust  - FW App Industry Data 1yr 9 22 10


Comping The Comp - Athletic Trends Robust  - FW App Industry Data 2yr 9 22 10


Comping The Comp - Athletic Trends Robust  - FW App Industry Data Brand 1 9 22 10


Comping The Comp - Athletic Trends Robust  - Fw App Ind AppChan 9 22 10


Comping The Comp - Athletic Trends Robust  - FW App Industry Data Channel 9 22 10


Casey Flavin



Retail: Scary Chart Of The Day


Out of Howard Penny's wheelhouse this morning: 99 weeks of unemployment benefits running out and no jobs.  This is the scenario facing many Americans heading into year-end.


Whatever your view on the role of government in today’s economy, it is undeniable fact that government intervention is having a dramatic impact on current conditions as well long term prospects.  With the creation of the Emergency Unemployment Compensation program in 2008, the government provided income for thousands, then millions, of Americans who would have otherwise been left with no source of income.  The result has been a propping up of consumer spending and the chart below shows that story.  The beneficiary, struggling to make ends meet, will spend a large portion of the check he/she receives.  That has helped stimulate consumer spending as more and more people joined the program.


These benefits expiring (in the absence of legislative action), will provide a year-over-year headwind for consumer spending.  As of the most recent data points, there are ~500,000 people receiving benefits under the Tier 4 category of the Emergency Unemployment Compensation program. 


Retail: Scary Chart Of The Day - Howard Atlas Penny


Howard Penney


Another week, another update... Macau growth slows this week


Macau slowed a bit in the third week of September.  The daily table GGR for the last 6 days slowed to HK$429MM from a daily average GGR of $485MM for the first 14 days of the month.  Based on the table revenues through the 20th as shown below, we are now projecting total September revenues at HK$14.5-14.7 billion, or 36-38% growth over September of 2009.  Directionally, market shares were similar to our last update, although Wynn’s share loss and MPEL’s share gain have grown.  Wynn's share plummeted to just 6.15% over the last 6 days, while MPEL's market share soared to 19%.  Our understanding is that low hold (~2%) is largely to blame for Wynn's share losses.  If Wynn's hold was really just 2%, normalizing hold while holding the other concessionaires constant implies that their market share would have been around 13.3% through Sept 20th - which is still below the 13.9% share Wynn had in August, and its lowest share since opening Encore. MPEL is up 80 bps since our update last week.  Despite apparently low VIP hold percentage, MGM’s share continues to climb in response to the company’s aggressive commission efforts.



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European Fundamental Bears and Currency Bulls

Hedgeye Portfolio: Long Germany (EWG); Long British Pound (FXB); bullish on EUR-USD


Today, Eurozone Industrial Orders disappointed forecasts on a month-over-month and year-over-year basis. The data is in line with our call for a slow-down in fundamental performance across most of Europe—a call we’re making over the intermediate term TREND and longer term TAIL as austerity measures drag down growth prospects across the region.


We’re however not bearish on Europe outright. As we noted in our post yesterday titled “The EU’s Guiding Hand”, we’re currently bullish on Germany, with the DAX outperforming many of the equity markets of its Western European peers, and bullish on the GBP and EUR versus the USD on a relative basis, as we see substantial downside in the USD and YEN, in particular. Our bullish intermediate term TREND lines for the Euro and Pound are $1.26 and $1.52, respectively.


Comparison Boost?


Even off “easy” year-over-year compares of -24.7% in July 2009, Industrial Orders rose only +11.2% in July 2010, and undercut a forecast of +16.2% (see chart below). As a compare, June 2010 saw a rise of +22.7% year-over-year off a compare of -25.8%. Certainly as compares get harder into year-end and demand wanes, we’d expect Industrial Orders to slow further.


Over the immediate term TRADE to intermediate term TREND we expect European bond yields to continue to push to the upside as investors demand a yield premium to own the sovereign debt threats imbedded in European countries that are struggling to contain bloated sovereign debt and deficit levels.  As an example, today, Portugal successfully issued €450 Million in debt due 2014 that commanded a yield of 4.695% versus a similar maturing bond issued on July 28th that commanded a yield a full 1% less.


While we see further downward pressure across European markets over the immediate term TRADE and intermediate term TREND, we’re comforted over the longer term TAIL that the EU community will effectively backstop the region to prevent another Greek default scare, a fact that should help to put in a moderate floor on the downside from here. 


Matthew Hedrick



European Fundamental Bears and Currency Bulls - e.orders

EARLY LOOK: Embracing Change



EARLY LOOK: Embracing Change - CHART2



Who would have thought Tim Geithner would be the last man standing on the Obama economic team?
First, let me say for those that don’t know, Lizzie O'Leary (@lizzieohreally) is a Washington D.C.-based correspondent for Bloomberg Television who covers politics and economic policy from the White House, Treasury Department, and Capitol Hill. She is officially a @Hedgeye twerp (a term of endearment).
So, Larry Summers is going back to Harvard.  President Obama campaigned on the theme “change for America” and a change it is.  Not the change we were promised, but one that is long overdue.
There are so many quotes from Larry, Tim or Ben that I could have used to start off the Early Look today, but I chose a one-liner from the @Hedgeye twitter feed that made me laugh, and there were many.  On a serious note, this country is in need of “change” and a new economic team at the White House is a great place to start.
Keith said it best last night:

EARLY LOOK: Embracing Change - CHART4


The popular press and the new media just skewered Larry Summers last night, which would have made him an easy target for today’s Early Look’s musing.  If you have not figured it out yet, I have embraced a change in my daily process by integrating Twitter as part of it.  For competitive reasons, I’m not going to say how, but Reuters and Dow Jones need to be looking at the Twitter business model very closely as it is their future.
The other one-liners that made the highlight reel on the Hedgeye Twitter feed:


EARLY LOOK: Embracing Change - CHART3



Ok, back to reality and the euphoria that has made September performance one of the best since the 1930’s.
So far this week, we have learned that the recession has ended and after the close last night the ABC consumer confidence index fell to -46 for the week ending September 19th, down 3 points from the week prior.  This news and the University of Michigan reading from last week spell bad news for consumer spending.  The recession may be over, but there are structural issues that demand immediate attention.  The data bears this out:


  • Over 41 million Americans are on food stamps.
  • 17 million children struggle with hunger in America. That's 1 in 4 kids.
  • 1 out of every 6 Americans is on some kind of anti-poverty program.
  • 1 out of every 7 mortgages was delinquent or in foreclosure in Q1 2010.
  • Over 8 million Americans are receiving unemployment insurance.


It’s going to have to be an impressive trick if the new Obama economic team can embrace change and get us out of this mess without feeling more pain.  As the saying goes - no pain, no gain!
The September month-to-date performance has been nothing short of spectacular, but it is difficult to reconcile this euphoria with the current fundamentals of the economy.  So far for the month of September, the Dow is up 8.62%, S&P up 7.45%, NASDAQ up 11.13% and the Russell 2000 up 10.4%.  With the Dow +0.07%, S&P (0.10%), NASDAQ (0.28%) and Russell 2000 (0.79%) yesterday, there was a clear lack of overall direction following the FED announcement; except for the direction of the dollar, which is getting crushed, down 1.1% yesterday and 3.2% over the past month.  The euphoric feel comes from:   


  • Consumer confidence is near “the great recession” lows and investor sentiment is near multi-year highs.
  • Some of the market darlings (AAPL and AMZN) look over extended.
  • The MACRO risks (housing and slowing GDP) have taken a back seat in September, but will rear their ugly heads soon.
  • The 2yr and 10yr yields are at record lows and the dollar is getting crushed.


The policies of the old Obama economic team were enough to keep us out of a full-blown depression, but were clearly not effectively dealing with the deficit.  The question is not whether or not the next team will prove any more adept at instilling confidence in government’s ability to address the nation’s debt.
The burgeoning healthcare bureaucracy, economic stimulus spending, bailouts, and the increase in military spending have all contributed to the explosion in federal debt over the past decade.  The continued growth of that debt has provided an illusion of an economic recovery.
In the chart below, we show one example of government spending providing an unsustainable crutch for government spending.  As America’s unemployed make their way through the 99 weeks of benefits afforded them by Uncle Sam through the Emergency Unemployment Compensation program, it is clear from Bureau of Labor Statistics data that the economy is not yet ready to put these people back to work.  Retail sales will certainly be impacted by people running out of these benefits – a stimulus that, like many others, has been financed by increased debt.



EARLY LOOK: Embracing Change - chart1

One last thought:

The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew.
-Abraham Lincoln


Function in disaster; finish in style
Howard Penney



This note was originally published at 8am this morning, September 22, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK and PORTFOLIO IDEAS in real-time.

Japanese Pensions: Risks to the Global Economy

Conclusion: Japanese demographics and pension obligations pose one of the biggest risks to the global economy.


Position: Short Japanese equities (EWJ); Short the Japanese yen (FXY)


At Hedgeye, we try to resist hyperbole as much as humanly possible in today’s manic, never-ending stream of real-time information. But after spending some time researching Japanese demographics and pension obligations, we feel they are one of the most dangerous TAIL risks to global investing over the next 10-20 years.


For background, let us attempt to quantify Japan’s demographic headwinds that are often bandied about (for good reason) without much supporting data. For starters, with 22.7% of its population above the age of 65 as of 2009, Japan has the world’s oldest population. That figure will continue to grow, as Japanese government projections have modeled that ratio to 29.2% by 2020 and 39.6% thirty years after that.


Japanese Pensions: Risks to the Global Economy - 1


Currently, the ratio of retirees to working-age Japanese is equal to 35.5%. In just ten years time, that ratio will be equal to 48%. In a society notorious for luxurious pension packages, going from a 3-to-1 base in potential contributors to a near 2-to1 base in a matter of just ten years is frightening to say the least. And it doesn’t get any better – by 2050, the ratio of retirees to working-age population will reach 76.4%, according to projections from Japan’s Ministry of Health, Labour and Welfare.


Japanese Pensions: Risks to the Global Economy - 2


The obvious conclusion here is that more and more people will be in line for pension payouts with less and less people to fund them. To that tune, the funding outlook looks incrementally more bearish when one considers that 56% of Japanese workers rely on financial support from their parents or other sources to cover their living expenses (Japanese Labor Ministry). As it seems, the people who are going to be counted on the most to fund ever-increasing pension liabilities are actually being supported by those very payouts they are needed to cover. This is not good.


This year, we’re already starting to see the ill-effects of funding gaps, with Japan’s public pension fund (the world’s largest at $1.433 trillion) increasing its asset sales by a factor of 5x year-over-year to bridge the gap between insurance premiums and payouts. According to Takahiro Mitani, president of the fund, the now 4 trillion yen ($48 billion) figure can be raised by selling any combination of assets (67.5% JGBs, 12% Japanese equities, 10.8% international equities and 8.3% in foreign bonds, including U.S. Treasuries), according to “market conditions”. We expect the asset sales by Japan’s public pension fund to continue accelerating as the first of Japan’s baby boomers turn 65 in 2012.


Expect the heavy hand of Japanese selling to weigh on global markets in the coming years. Despite this, Mr. Mitani remains convinced that the interest rates on Japanese government bonds will not increase from the potential glut of new supply on the market. We beg to differ. We all know what happens when marginal supply outweighs marginal demand – prices decline.


On the demand front, Japanese government debt (which is north of 200% of GDP) has largely been financed by domestic investors (94%; IMF). Japan’s savers, however, are shifting on the margin to consumers as they age rapidly: Japan’s household savings rate (as a % of disposable personal income) has declined 1,170 bps over the past 20 years to 2.2% (IMF; OECD).


Japanese Pensions: Risks to the Global Economy - 3


Much has been made about the fact that direct holdings of JGBs by the household sector are only ~5% of the total outstanding amount. When indirect channels are taken into account, however, Japanese households finance 61.5% of JGB issuance through banks and pensions funds, after factoring in an incremental 10% of JGBs held by the basic public pension fund that will be paid out as future liabilities (BoJ Flow of Funds Statistics; IMF).


Japanese Pensions: Risks to the Global Economy - 4


To compound the decline in domestic demand, a recent report from Mizuho Trust & Banking Co. (Japan’s second largest bank) suggests that demand for 20 and 30-year JGBs will start to wane in the next few years as purchasing from major Japanese life insurers peaks out.


With regards to supply, Japan’s budget deficit as a % of GDP is currently 8.7% (IMF) and more spending initiatives, such as current Prime Minister Naoto Kan’s recently announced 915 billion yen ($11 billion) stimulus plan, don’t suggest that figure will come in meaningfully over the next few years. In fact, baseline IMF projections (taken for whatever they’re worth) have Japan’s budget deficit as a % of GDP at 7.2% in 2015. This means that they will need to continue to issue large sums of government debt to finance deficit spending.


Japanese Pensions: Risks to the Global Economy - 5


Combined, the outlook for future demand for and supply of Japanese government bonds is one of gross disequilibrium to the supply side, which should, in theory, push down prices substantially and send yields soaring. Currently, about 10.6% of Japan’s federal budget goes to interest payments, which is much higher than the 7.8% we see in America (Japan Ministry of Finance; BEA). Further, all-in National Debt Service, which includes interest payments, bond redemption and administrative costs, stands at roughly 22.4% of Japanese government expenditures.


Japanese Pensions: Risks to the Global Economy - 6


This figure is one to keep any eye on, as bond redemption costs are arguably a growing canary in the coal mine as it relates to the Japanese fiscal situation. Known as the “60-year Redemption Rule”, Japan’s current debt servicing system requires JGBs to be completely redeemed in cash over a 60-year period irrespective of bond duration – using sources of income other than refinancing. Simply put, Japan can’t just pile more debt upon debt to meet all its refinancing costs. This will continue to be headwind for the Japanese government budget, likely forcing them to meaningfully raise taxes and implement substantial austerity measures over the next decade.


That will be tough, considering that Japan’s dependency ratio (ratio of elderly and children to the working-age population) will grow 1,017 bps to 66.7% in that time span, according to the Japanese Ministry of Health, Labour and Welfare. Plainly stated, the Japanese citizenry will likely need spending to increase over this time period while the government will need to cut its budget meaningfully and raise taxes. We saw what happened in the streets of Greece this summer after the government implemented tough austerity measures. Japan is much, much larger than Greece (population: ~127.5 million vs. ~11 million in Greece).


Circling back to my previous comments regarding the possibility of Japanese interest rates backing up significantly, history tells us that this could happen over a span of decades or, as we saw this summer, in a matter of months once the global investment community (who will be increasingly responsible for funding JGB issuance as Japanese domestic demand wanes) loses confidence in Japan’s fiscal sustainability.


Of course, there’s always the Paul “PRINT LOTS OF MONEY” Krugman factor to consider, whereby Japan could in fact “PRINT LOTS OF MONEY” to buy more of its own government debt. Currently, the Bank of Japan holds about 8% of total JGBs as a result of its monthly purchases designed to stabilize market conditions (IMF). How much more JGB financing could the BoJ undertake without major unintended consequences (i.e. global asset inflation, yen debasement, etc.) is beyond us.


What is not beyond us, however, is where this ship is likely headed over the next 5-10 years. As a result of growing underfunding, Japan’s pension fund may have to invest in riskier assets to meet its long-term payout needs. An entity as large as Japanese pension funds collectively joining the global search for yield will provide a substantial amount of incremental demand for emerging market stocks and bonds over the next decade and beyond. Mr. Mitani, who recently said his mandate is to invest in “safe” assets with a long-term view, may need to step outside his comfort zone pretty soon if the Japanese pension system isn’t to implode upon itself (and the global financial system).


We understand this note sounds alarmist, as it probably should. Similar to Bob Shiller warning everyone about housing in the mid-2000’s, we think the growing liabilities of the Japanese pension system pose a major threat to the global economy. Of course, a crisis isn’t likely to ensue tomorrow or next year, though the probability of a major crisis happening in our lifetime is a lot higher than not, in our opinion.  We would be remiss, however, not to send a golf clap in Japan’s direction for at least addressing the problem: the number of Japanese workers in defined-contribution plans (which reduce future pension liabilities on the margin) has grown 40x since 2001 to 3.5 million in 2009 (WSJ). Unfortunately, that’s only 2.7% of the working-age population, so there’s more work to be done to say the least.


God speed, Japan. God speed.


Darius Dale


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