FINL: A Few Callouts

FINL’s earnings of $0.31 after the close yesterday came in considerably lighter than consensus estimates at $0.35 causing shares to trade sharply lower in the aftermarket. After taking a closer look at the numbers, here are a few notable callouts ahead of the company’s call this morning:

  • Top-line growth of +1% marked a clear divergence between on and off-mall players in the space with both DKS (+9%) and HIBB (+14%) posting solid numbers while results out of FINL and FL (-0.3%) lagged their off-mall counterparts considerably.
  • Inventories down only -2% relative to +1% sales growth resulted in the most significant SIGMA turn in the space following several quarters of significant reductions in inventory. Similar to top-line trends, within the four company peer group, Q2 was evenly split between those building inventory (DKS +4% & HIBB +2%) versus those reducing inventories (FL -5% & FINL -2%). While top-line trends lagged for mall-based players, inventories remain tighter. With sales in August and into September improving materially, this is a good scenario and likely to continue to keep promotional activity in check.
  • The comp (+2%) is reflective of just how soft Q2 was during June and July. Additionally, while the early read on Q3 was positive with comps up +7% in the first 3-weeks of June, it’s important to consider that comps were considerably more difficult on a 1-year basis due to the timing of stimulus checks in ’08 - see the monthly comp trend table below. Comps up +6.7% on a +7% comp in the same period last year so far through September 19th is consistent with what we are seeing in weekly data trends.  
  • Footwear comps up +2.0% were in-line with softgoods comps up +2.1% in Q2.

While comps are catching our eye once again, we are confident that industry weakness in June and particularly July was the primary cause of a weaker comp relative to consensus expectations. We’ll have additional color after the call at 8:30am EST.


FINL: A Few Callouts - SG SIGMA 9 10


FINL: A Few Callouts - FINL MoComp 9 10


FINL: A Few Callouts - SG CompTable 9 10


FINL: A Few Callouts - SG CompChart 1 9 10


FINL: A Few Callouts - SG CompChart 2 9 10


Casey Flavin


R3: TSA, HD, Kobe, and China F/X



-Call it a sign of the times and a huge opportunity for the action sports industry. Skateboarding is slowly making its way into gym classes across the country. A standardized skateboard P.E. program developed by a company called Skate Pass has now been approved by 500 schools in 31 states and countries including Canada, Germany, Singapore, and the Dominican Republic. It is estimated that 1 million kids now have the opportunity to take “skate” as part of their phys ed requirements.


-The fashionista Twitterati are all over the Prada’s Spring/Summer ’11 line which brought back bright pinks, day-glo orange, and other neon hues. If this is the beginning of a trend, then Express is the place to go for mainstream prices on 80’s styled goods. Or, better yet dig into your closet and pull out your favorite neon wares that are now coming up on age 30.


-Keep an eye on mall traffic and the practice of banning unaccompanied minors from malls. It turns out that the trend of banning unaccompanied teens from the mall is gaining some steam and it has having a positive impact on traffic. Apparently, kids appear to be dragging their parents to the mall to comply with the rules, which in turn is likely leading to additional purchases by mom and dad. It’s unclear if the traffic/sales trend will continue, however the practice of turning away mall rats appears here to stay. 66 malls currently ban unaccompanied minors, up from 37 just 3 years ago.




Sports Authority Taps Team Detroit - Team Detroit has landed creative and media duties on Sports Authority after a review, the brand has confirmed. Team Detroit managing director Brad Audet said he was "delighted to partner with Sports Authority to help them become the number-one retailer in sporting goods."  <>

Hedgeye Retail’s Take:  Gearing up for an IPO with a fresh creative effort.  Smart move.


Home Depot and MRM Split Up After Just 9 Months Because HD Won't Pay Up - MRM, a direct and digital marketing unit, has split with Home Depot, just nine months after landing digital and customer relationship management duties for the retailer, according to an internal MRM e-mail. Sources attributed the split to Home Depot requesting work beyond the original scope without paying additional compensation. In the e-mail, MRM New York managing director Corey Mitchell wrote that "for reasons based on a fair exchange of services and a mutual inability to arrive at realistic expectations, we are choosing to walk away from our relationship with The Home Depot completely."  <>

Hedgeye Retail’s Take:  Without being privy to the intricacies of the arrangement, there’s not much to say here.  Despite this snafu, we expect the digital platform at HD to continue to grow in relevance both from a sales and marketing standpoint.


Kobe Bryant Repeats as Top-Selling Jersey in China - During the 2009-10 season, reigning two-time NBA champion Kobe Bryant had the top-selling NBA jersey in China for the fourth consecutive season. <>

Hedgeye Retail’s Take:  We wonder if Starbury and Iverson and can unseat Kobe this year with their moves to actually play in China?  Yes, that’s a joke. 


U.K. Online Shopping Will Slow `Significantly,' Verdict Says - U.K. online shopping will grow at a “significantly” slower pace as the Internet becomes more common among the population and government spending cuts weigh on shoppers, according to Verdict Research. Average annual growth will be 12% between 2009 and 2014, compared with 35% in the previous decade, the market researcher said. Online sales rose to 20 billion pounds ($31 billion) in 2009, or 7% of total retail spending. <>

Hedgeye Retail’s Take:  While this survey appears to be taking the path of conventional wisdom, it’s important to note that many of Europe and the UK’s most relevant retailers are just entering the world of e-commerce now.  As such, we’d expect growth rates to remain robust, much like we see here stateside over the near to intermediate term.


Forrester Study on American M-Commerce - 5% of U.S. adults who own mobile phones have used their phones to research products before making purchases. 2% of those consumers have purchased merchandise via their phones, according to a new study from Forrester Research Inc. This translates into millions of consumers engaging in mobile commerce, which experts believe will continue to grow as more consumers purchase smartphones, a key driver of m-commerce. The market has shown over recent years that the more smartphones that land in consumers’ purses, hands and pockets—and their number is growing dramatically—the greater the use of the mobile web. <>

Hedgeye Retail’s Take:  With only 25% penetration of smartphones, there is still substantial runway ahead for m-commerce growth.  Over the intermediate term, product research is likely to remain the key use of the device until a better shopping interface evolves on a tiny screen.


Tourism Spending Grew Faster than GDP in Q2 - Real spending on travel and tourism rebounded much fast than the overall economy in the second quarter as travel and lodging prices continued climbing, the U.S. Department of Commerce reported. Spending on all tourism goods and services, including passenger air transportation and traveler accommodations,  increased at an annual rate of 3.0% in the second quarter, following an increase of 5.0% (revised) in the first quarter. By comparison, real gross domestic product (GDP) increased 1.6% (second estimate) in the second quarter after increasing 3.7% in the first quarter. Travel and tourism prices increased 2.7% and 4.1% respectively during the two quarters. <>

Hedgeye Retail’s Take:   While improved, we’re still not seeing retailers with tourism-centric locations driving disproportionately positive results as we have seen at times over the past couple of years. 


US-China Currency Battle - President Obama has put China’s currency policies front and center. Obama and Chinese Premier Wen Jiabao had their longest and most “intensive” discussion about the issue on the sidelines of the United Nations General Assembly meeting in New York on Thursday, the White House said, as tensions between the two nations escalated on the eve of a vote in the U.S. Congress on a punitive bill targeting China’s currency. The leaders’ bilateral meeting came after a week of tough talk that prompted concerns in the business community about a new trade fight over China’s allegedly undervalued currency. Critics say the yuan is undervalued by as much as 40 percent, putting U.S. products at a competitive disadvantage to China’s cheaper exports.  <>

Hedgeye Retail’s Take:  The battle here is ongoing, but the qwest to find companies with a macro process and an ability to manage/mitigate currency risk is becoming increasingly more relevant.  Nike and Li & Fung remain companies well positioned relative to the ever changing China/US/ROW currency battle.

EARLY LOOK: Don't Eat Yellow Snow



“Even if you are on the right track, you will get run over if you just sit there.”

-Will Rogers



EARLY LOOK: Don't Eat Yellow Snow - Will Rogers




Oklahoma’s favorite son, Will Rogers, probably didn’t know it at the time but he made a very important contribution to modern day risk management with the aforementioned quote.


Rogers was our kind of guy. Multi-factor, multi-duration, and not afraid to put his thoughts out there for everyone to criticize every day. He was transparent and didn’t feel compelled to live a professional life of opacity. He lived his life out loud.


By the time he passed away in 1935, Will Rogers penned more than 4,000 nationally syndicated newspaper columns and produced 71 movies. He also traveled across the world 3 times. This gave him a unique perspective on the interconnectedness of human behavior.


The most important thing we can acknowledge about human behavior when we buy or sell something is that we are human. By nature, we are more likely to think something we own is worth more than it’s worth. Ultimately, the market’s last sale decides the price.


Another critical acknowledgment in modern day risk management is that the game is changing at a rate that’s representative of global economic imbalances, fund flows, and geopolitical risks. Never before has the US government sponsored so much market volatility. Never before has the hegemony of US economic power been such a question mark. Never is a long time.


My son Jack is barely 3 years old, but as winter approaches he will be old enough to learn his first few rules in risk management. Never eat yellow snow, and never trust a professional politician.


Whoever chooses to trust Greek, Irish, or US politicians who are telling us that they’ll never have to default on any long term liability because they have figured out how to print short term debt-upon-debt-upon-debt subscribes to a belief that the history of sovereign debt cycles doesn’t support.



EARLY LOOK: Don't Eat Yellow Snow - Flags



If you choose to trust what you see, recognizing this globally interconnected game of risk is always “risk on”, you are most likely going to see this Fear of Government trading environment plainly. You don’t have to “just sit there” and suck it up. You can keep moving.


There are two ways that I’ve applied this basic strategy of motion to express my investment views: 

  1. Hedgeye Asset Allocation Model: Managing the gross exposure of my CASH position dynamically.
  2. Hedgeye Virtual Portfolio: Managing my LONG versus SHORT positions, aggressively, on a net basis. 

I don’t run a hedge fund anymore. So far, this is the best I can do to communicate what it is that I am trying to recommend you do out there. I know that other people don’t do it this way. I also know that I’ll need to keep changing what it is that I do or I’ll get “run over.”


Back to explaining what it is that I’ve been doing this week…


1. Dynamic Asset Allocation to CASH:

  • On Tuesday when I “Walked The Line” (title of Early Look note that morning) and the SP500 was testing a breakout above my intermediate term TREND line of 1144, I moved to 64% CASH = selling strength.
  • On Thursday, after the SP500 closed down for the 3rd day in a row, I reinvested 6% of that CASH position into Commodities (DBA) and German Equities (EWG), taking my CASH position down to 58% = buying weakness.
  • This morning my Hedgeye Asset Allocation is as follows: Cash 58%, Int'l FX 21%, Bonds 9%, Int'l Equities 6%, Commodities 3%, US Equities 3%.


2.       Aggressively Managing Risk Around My Net LONG/SHORT position:

  • On Monday morning at SPX 1125 I had 13 LONGS and 10 SHORTS.
  • On Wednesday morning at SPX 1139 I had 8 LONGS and 10 SHORTS.
  • This morning at SPX 1124 I have 11 LONGS and 7 SHORTS.  


Naturally, some “fully invested” asset managers are going to look at this and say a few things: 

  1. You can’t hold a cash position like that.
  2. You can’t time markets like that.
  3. You can’t … 

But, yes I can.


Rather than just sit here and accept that at any given moment in my day the government can either squeeze me or displease me, for now I’m going to keep moving with an explicitly large amount of cash on the sidelines to deploy whenever I see the opportunity to do so.


My immediate term support and resistance levels for the SP500 are now 1113 and 1143, respectively.


Enjoy your weekend and best of luck out there today,



Keith R. McCullough
Chief Executive Officer



EARLY LOOK: Don't Eat Yellow Snow - 1

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Blinders off: time to stop denying inflation



“Lacking much experience with this option, we do not have very precise knowledge of the quantitative effect of changes in our holdings.”

–Ben Bernanke



EARLY LOOK: QE Mees - Bernanke Hedgeye Image



While it’s entertaining, it’s also quite frightening to watch the same failed policy makers and the pundits that pander to them fundamentally believe that they understand exactly how this “QE” experiment is going to play out. Fortunately, Ben Bernanke is not one of those people.


Now that they’ve been liberated from Larry Summers assuring them that he knows exactly what he is doing, here’s a simple risk management exercise for Groupthink Inc in Washington today.



EARLY LOOK: QE Mees - Summers Hedgeye Image



Consider this part of your post Summers rehab – baby steps guys:

  1. Re-read the aforementioned quote
  2. Then count how many times you hear the media say QE today
  3. Then re-read that quote again before you go to bed tonight

Now we don’t purport to have “precise knowledge of the quantitative easing effects” on the US economy either. Einstein himself said that “if we knew what we were doing, it wouldn’t be called research, would it?” That said, our fundamental macro research does point us toward Japan’s experiment with QE as being an unsuccessful one.


While the United States of America in 2010 may not “precisely” be Japan of 1997, there are plenty of similarities developing in terms of Big Bureaucratic Government resolve. If you have any recovering friends from Groupthink Inc who make it past the remedial exercise above, please send them our Chart of The Day (see below) that overlays the Japanese real estate bubble with ours. *Note the duration.



EARLY LOOK: QE Mees - Japan U.S. Real Estate



For really advanced stage rehabilitation from the Academic Dogma that’s been driving Ben Bernanke and Larry Summers policy making decisions, you can overlay Japanese Government Bonds Yields (JGBees) with US Treasury Yields (QE Mees). While we don’t have “precise” measurements on how low the rate-of-return on America’s aging population’s hard earning savings accounts can go, we do see ZERO percent as a credible gravitational force.


We’ll be expanding our Japanese research effort in Q4, but if you’d like a taste of the contrarian Hedgeye cool-aid, please send an email to and we’ll get you a solid report from our Hedgeye Jedi, Darius Dale, who punched out a not yesterday titled, “Japanese Pensions: Risks to the Global Economy.”


Post-rehab students of objective macro-economic research have learned that the Japanese demographic curve started to age before America’s baby boomers did. Importantly, this doesn’t mean America can’t age in due course. Advanced research studies on campus here in New Haven have revealed that time, as a risk management factor, is actually quite hard to reverse.


All the while (alongside time), there’s this other little research critter we monitor here at Hedgeye called price. Again, this is getting into the really advanced stuff folks, so try to “dumb this down” if you attempt to explain this to anyone in Congress, but TIME and PRICE are significant factors in a modern day risk manager’s search for more “precise” knowledge about future probabilities.


Now let’s go to the future state - if we really want to dial up Washington’s fully loaded rehab research engine we gotta go where Heli-Ben has never gone before. As Buzz Lightyear would say, “to infinity and beyond” – the cosmic galaxy of the hedgie universe – REAL-TIME PRICES!


I know, I know… this is deep. But let’s suspend disbelief for a moment and take a gander into the cosmos of Hedgeye REAL-TIME PRICE research and look at what we see:


1.  Currencies: The US Dollar is down for the 14th week out of the last 17, breaking to lower-lows that we havn’t seen since mid-April when chaos theorists in New Haven said something about May Showers. Sounds serious, because when you Burn The Buck at the stake, it starts to become a very bad thing - importing crazy critters that Bernanke has never seen (like inflation, shhh…).


2.  Bond Yields: US Treasury yields are getting pulverized again this morning on the short end of the curve, with 2-year yields in America hitting their lowest levels ever. Ever, of course, is a long time… and while we can’t tell you “precisely” how poorly this ends for a lot of people in this country, we can assure you this ended poorly in Japan.


3.  Equities: US stocks have backed off of the line I said I was going to walk this week (1144 in the SP500), leaving our intermediate term TREND line of resistance intact. Whether or not the perma-bulls want to admit that lower-highs in everything US equities since 2007’s leverage-cycle-peak matter or not is something that Nikkei bulls in Japan have been powdered by since Gordon Gekko’s last 1980’s dance.


QE ain’t for me.


My immediate term TRADE lines of support and resistance for the SP500 are now 1127 and 1146, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer




This note was originally published at 7:59am, this morning September 23, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK and PORTFOLIO IDEAS in real-time.

THE GRIND: SEPT 23, 2010



THE GRIND: SEPT 23, 2010 - Notebook Image Hedgeye


Another day, another grind…




1.      SP500 continues to hold immediate term TRADE support of 1127

2.      Range in my 3-day SPY probability model remains tight and trade-able

3.      Volatility (VIX) already shot up this week from where it should have (21 support) and is now immediate term TRADE overbought

4.      All 9 sectors in our SP500 Sector Risk Mgt model remain bullish from an immediate term TRADE perspective (XLF barely holding on however)

5.      Larry Summers is leaving

6.      US Housing Starts improved finally (month-over-month) to 598,000 (AUG) vs 541,000 (JUL)

7.      TED Spread remains very narrow at 14bps wide, showing little to no counterparty risk

8.      FTSE and DAX continue to trade bullish on both our TRADE and TREND durations – both look healthier than the SP500

9.      Brazil flashing positive divergences versus global equities this week and remains bullish TRADE and TREND despite Brazil’s inflation accelerating this wk

10.  Commodities (CRB Index) remain in a Bullish Formation (bullish across all 3 of our risk mgt durations: TRADE, TREND, and TAIL)

11.  Agricultural and “soft” commodities like cotton are leading the overall bullish trend in the CRB Index (energy is the drag)

12.  Gold maintains its Bullish Formation, making higher-highs and higher-lows in the face of the Fear of Government Trade

13.  China’s Premier Wen tells Groupthinkers in Washington like it is this week (ie a sharp 20-40% appreciation of the Yuan would blow things up)

14.   Czech government issues a 2011 plan to cut deficit by 17%

15.  Russian government continues to cut spending and attempt to issue sovdebt in order to meet 2011 strategic plans



1.      SP500 remains broken from an intermediate term TREND perspective w/ our “Walk The Line” level sustaining overhead resistance at 1144

2.      US stock market breadth continues to deteriorate (hyper early signals, but they aren’t the bullish factors they were 3 weeks ago)

3.      US stock market down days are led by the Financials (XLF) this week and the low-beta dividend trade (XLU) is flashing bullish again

4.      ABC Washington Post Consumer Confidence dove wk over wk back down to -46 vs -43 last week (2wks of not up despite stocks being up)

5.      MBA mortgage applications fall for the 2nd consecutive week to -3.3% this wk (this is one of our lead high-frequency US growth indicators)

6.      Jobless claims rise for the 1st week in 4, to 465,000, reminding risk managers that what we have here is JOBLESS STAGFLATION

7.      II Bullish to Bearish weekly indicators are now flashing one of the most bearish contrarian signals I have seen on immediate term TRADE basis ever

8.      US Existing Homes Inventory drops from 12.5 months to 11.6; that’s still a gargantuan mountain of reported supply (ex-shadows)

9.      Baltic Dry Index is down for 8 days in a row

10.  Japanese equities were down when they traded this week

11.  Asian Equities that traded last night caught an inflation cold as the inflation data for AUG in Singapore, Malaysia, and HK all ramped month over month

12.  Eurozone Manufacturing PMI slowed in SEP to 54 from 55 in AUG

13.  Eurozone Manufacturing Services-PMI slowed in SEP to 54 from 56 in AUG

14.  Germany’s Manufacturing and Services PMIs tracked the same sequential rollover that the overall region did

15.  French and German Unions made headline news today; everything about Austerity isn’t kind

16.  Italy finally reported Q2 unemployment and it went up again to 8.5% vs 8.4% in Q1; Italy continues to concern us more and more on the margin

17.  Russian and Norwegian Equities are breaking down as the price of oil does

18.  Oil price has confirmed an intermediate term TREND line breakdown this week with critical TREND line resistance = $76.16/barrel

19.  Natural Gas remains in a Bearish Formation (bearish TRADE, TREND and TAIL) and looks like it wants to test $3.60

20.  Portugal is selling more and more sovereign debt at higher and higher yields; this won’t end well

21.  Greek stocks look horrendous again this week despite Papandreaou doing roadshows in America

22.  US Treasury yields continue to break down to lower-lows across the curve with 2-yr yields hitting all time lows

23.  Yield Spread (10s minus 2s) has compressed 17bps week to date (explains why XLF (Financials) is flashing another negative divergence vs SPY today

24.  US Dollar is breaking below APR and AUG lows; pervasive BURNING OF THE BUCK becomes a bad thing for globally interconnected risk

25.  US Rumor Mill chasing about everyone buying everyone has yielded ZERO takeouts of the 69 we observed as “rumors” this week; sad

Time is running out on both September month end and Q3. There are performance problems in our industry and I think this reality combined with a liquidity squeeze to cover shorts has kept this market from going down this week. That said, it hasn’t gone up either – and that is new. So are the DATA and PRICES tilting demonstrably to the bearish side (relative to where they were 3 weeks ago) in my notebook.
As a result, I continue to:

    A)    take down gross invested exposure in the Hedgeye Asset Allocation Model and...


    B)    sell longs in our Hedgeye Portfolio. On a weak market open today, I covered 3 short

            positions (WYNN, HOT , and CRI) and bought 1 long (DBA).


I plan on staying in a low-gross-exposure position and at the same time aggressively trading (or managing risk around) short positions for the next few weeks. I am increasingly worried about October.

Keith R. McCullough
Chief Executive Officer

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Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.