Initial Claims 

Initial claims dropped 16k last week to 453k (falling 12k before the revision).  Rolling claims came in at 457k, a decline of 6.25k over the previous week. Reported claims fell near the bottom of their YTD range of 450-470k, but, importantly, are still squarely in the YTD channel and well above the 375-400k range necessary for the unemployment rate to fall.


An article in the New York Times last weekend (link sign-in required) highlighted the expiration of a stimulus program that directly subsidizes jobs, paying employees’ salaries in whole or in part to encourage small businesses, nonprofits, and government organizations to hire.  The $1B funding was a part of the emergency fund for the welfare program Temporary Assistance for Needy Families.  “The federal program has helped employ nearly 130,000 adults and has paid for nearly an equal number of summer jobs for young people, according to an analysis by the Center for Budget and Policy Priorities, a liberal policy institute in Washington,” reported the Times.  The program expires today, unless Congress and the President agree to extend it.  The Times noted that the extension is opposed by Congressional Republicans against further stimulus-related spending.  If the job creation estimate is correct, this could be a significant headwind for the initial claims series. 






Our firm's expectations for an ongoing economic slowdown relative to the first half of the year and into 2011 will keep a lid on new hiring activity as management teams focus on cost control. All of this raises the risks that a prospective slowdown in GDP will precipitate an incremental slowdown in hiring/pickup in firings, which will, in turn, further pressure growth. We continue to look to claims as the best indicator for the job market, as they are real time and inflections in the series have signaled important turning points in the market in the past.


Yield Curve

The following chart shows 2-10 spread by quarter while the chart below that shows the sequential (quarterly) change. The 2-10 spread (a proxy for industry NIM) has been compressing rapidly in the past two quarters. Yesterday’s closing value of 207 bps is down from 212 bps last week. This quarter vs. last quarter is down 38 bps, which is a sequential acceleration from 2Q10 being down 19 bps vs. 1Q10. Moreover, the yield spread, were it to stay flat at present levels through 4Q10 would lead to a 4Q10 sequential decline of 17 bps. The headwind will grow in significance as it affects most companies on a lag.






The table below shows the stock performance of each Financial subsector over four durations. 




Census headwinds should finally abate on or about this week as end of September has historically been the last significant month of Census firings.




Joshua Steiner, CFA


Allison Kaptur



September 30, 2010



M&A heats up with a rumored sale of Destination Maternity.  What’s interesting about this deal is the fact that the shares are at all-time highs, reflecting the company’s efforts to turn the business around.  Can’t fault the board for selling at the top. 




  • According to the NRF, this Halloween marks the highest percentage ever of Americans expecting to wear at costume. 40.1% of consumers expect to dress up vs. 33.4% last year. American’s also plan to spend 17% more this year on the holiday, for an average spend just over $66 on a costume, candy, and decorations. Clearly the consumer still likes to have some fun, despite the fact that spending overall remains in check.
  • Another day, another e-commerce launch. This time French luxury fashion house, Lanvin has launched its e-commerce site. Clearly the consumer (and the brands) have confirmed that shopping online can pretty much work across all price points, high and low.
  • Lawsuits regarding the effectiveness of Shape-Ups aren’t the only legal battle that SKX is facing. The latest suit, revealed by gossip site TMZ, was brought on by high profile photographer Richard Reinsdorf. The suit claims that Skechers has been using his work (multiple projects since 2006) well beyond its contractual life. He’s suing for $250 million! Stay tuned as this soap opera is likely to heat up.
  • Texans are getting annoyed with H&M’s latest marketing campaign featuring the Fall collection. It turns out that the fast-fashion retailer does not have a single store in the state, but yet continues to tease fashionistas with its latest wares. There is hope however, given that New Yorkers were also teased for years by Target, only to finally receive a location on the island of Manhattan.



Destination Maternity on the Block - Global M&A activity shot up to $599 billion in the third quarter, a rise of 35.6 percent from a year earlier, according to Thomson Reuters. It was the biggest August for wheeling and dealing in more than a decade. Although promising deals can go south quickly and the economy can turn on a dime, much of fashion seems to be up for grabs right now. The latest is Destination Maternity Corp., which is being shopped around by investment firm Peter J. Solomon Co., according to sources. Both the company and the investment bank declined to comment Wednesday. Destination Maternity could give somebody a big leg up in the moms-to-be market. The firm has an enterprise value of $225 million and 701 stores under the Motherhood Maternity, A Pea in the Pod and its namesake banners, as well as licensed businesses in Macy’s, Sears and Kmart. <>

Hedgeye Retail’s Take: Different than most retail takeouts, DEST is sitting at all-time highs. Perhaps the opportunity to sell before things begin roll over is what’s tempting the board to find a buyer. 


Kohl's Store Openings - One day after J.C. Penney Co. Inc. revealed plans to open new stores, Kohl’s Corp. said it unveiled 21 units in 15 states on Wednesday. Kohl’s said the new stores will add 3,000 jobs in Alabama, California, Florida, Illinois, Kansas, Kentucky, Louisiana, Maryland, Minnesota, Missouri, Nevada, New Mexico, New York, Ohio and Pennsylvania. Kohl’s on Wednesday also opened a new customer and operations center in San Antonio for its charge card business and, which saw a 38 percent jump in revenues last year. So far this year, Kohl’s has opened 30 stores, bringing the total units to 1,089 in 49 states. Both Penney’s and Kohl’s are remodeling stores with an emphasis on fashion. Kohl’s is targeting 85 stores for facelifts this year, a 66 percent increase from 2009. <>

Hedgeye Retail’s Take: Kohl’s still has the edge here with its flexible, off-mall real estate strategy and opportunistic view on acquiring blocks of vacant stores. JCP is likely to struggle to open its stated 75 store goal by 2014, while KSS will surpass that amount of openings by then end of next year. 


Fisher Flops from Nike to Adi - Derek Fisher, the Los Angeles Lakers point guard and long-time Nike endorser, has signed a shoe endorsement contract with Adidas. Fisher, 36, was intrigued with the possibility of working with Adidas after his playing career ends, said Chris Grancio, Adidas head of global sports marketing, to the Oregonian. Fisher had previously endorsed Nike basketball shoes for 10 of his 14 years in the NBA <SportsOneSource>

Hedgeye Retail’s Take: There’s been lot of shifting of athletes between endorsing brands of late, particularly in Basketball. What’s noteworthy here however, is the ESPN model of a ‘life after (pick your sport)’ pitch which becomes increasingly more valuable for ‘aging’ athletes in their 30s. I wouldn’t be surprised to see more of these clauses used as a strategic tool by brands.   


Employment Base at Wal-Mart to Grow - Wal-Mart Stores Inc., the world’s largest retailer, plans to increase its workforce by 36 percent in the next five years as global economic growth boosts spending. New employees will be hired “mostly” outside the U.S., Susan Chambers, executive vice president for human resources, said in a speech at a conference in New Delhi today. “The opportunity for growth is not just in India but global,” she said, without providing more details on the hiring plans. Wal-Mart, the world’s largest listed company by sales, plans to have 3 million workers in five years from 2.2 million now, Chambers said. India may decide in three months whether to relax restrictions on investment in the retail industry by overseas companies including Wal-Mart, Carrefour SA and Tesco Plc, junior trade minister Jyotiraditya Scindia said Sept. 18. <Bloomberg>

Hedgeye Retail’s Take: There’s no denying that adding 160K jobs per year is likely to be a key political positive as WMT marches across the globe.  If India relaxes foreign direct investment, we still believe the opportunity to have a meaningful business is many years away.   


Currency Reform for Free Trade Act Passes House - The U.S. House of Representatives passed the Currency Reform for Fair Trade Act (H.R. 2378)  by a vote of 349 –78 Wednesday, increasing pressure on the People's Republic of China to hasten the appreciation of its currency. In short, the bill clarifies that countervailing duties (CVD) may be imposed on imports to counter subsidies that are the result of the producing country’s fundamentally undervalued currency.  While the legislation does not specify China as the target of the legislation, the bill was clearly introduced and passed with the intention of forcing China to appreciate the renminbi, notes Alex Boian, director of trade policy at Outdoor Industry Association in a trade alert sent to members.  The bill provides direction to the U.S. Department of Commerce that undervalued currency must be considered when investigating countervailable subsidies. <SportsOneSource>

Hedgeye Retail’s Take: Lots of activity in the House yesterday. One can’t lose sight of the fact however, that a stronger renminbi will most likely result in even higher cost inflation out of China – an issue already plaguing retailers. Historians are also calling to attention the rise of the yen in the 80s, which failed to resolve the trade imbalance between the U.S. and Japan.


Organized Retail Crime Bill Passes the House - Congress took a step forward in cracking down on organized retail crime as the House passed a bill Tuesday night that would give federal law enforcement officials new funding to go after criminals. The House passed the legislation under fast-track rules that required a two-thirds majority. For the first time since the issue has gained attention on Capitol Hill, the House approved one of a total of five pending bills addressing organized retail crime. The fashion industry has a big stake in legislation combating the crime, which has been on the rise in recent years as criminals become more brazen and larger quantities of merchandise are being stolen at stores nationwide. The Federal Bureau of Investigation estimates organized retail crime costs U.S. merchants $15 billion to $30 billion annually. The bill would authorize $5 million per year for fiscal years 2011-2015 and direct the U.S. Attorney General to set up an organized retail theft and prosecution unit with the Department of Justice to help state and local law enforcement agencies investigate and prosecute the theft. <>

Hedgeye Retail’s Take: According to the NRF, retailers lose between $15Bn to $30Bn to crime annually on high demand easy to sell items that can be resold online or to pawn shops. While allocating $5Bn a year as proposed by the bill should help stem this activity, it will take some time before results are known. It will however, help fray costs for retailers that have tried to keep shrink under wraps themselves.


Change in Import Tariff Guideline Dropped - U.S. Customs & Border Protection officially withdrew a proposal today that would have raised duties on imported apparel, laying to rest an issue that stirred up a good amount of industry controversy when it was first raised. The proposal would have changed how Customs calculated import duties by altering the “First Sale Rule.” Under the rule, Customs pegged the value of imported finished goods to their cost at the first point of sale in the supply chain, such as when a product was sold by the factory to a wholesaler. Customs had proposed to change that to calculate value based on the final cost at the point where a product entered the U.S., typically the wholesale price. Opponents argued that changing the rule would increase duty rates because the value of products is higher further along the supply chain. Customs had backed off its proposed rule change as early as August 2008, but did not officially withdraw the proposal until Wednesday. <>

Hedgeye Retail’s Take: It’s good to see some voice of reason heard when it comes to new legislation. In what was originally proposed as a mark-to-market + premium model – the bottom-line is less money in government coffers and less pressure on the supply chain for retailers.


Influential 'Mom' Bloggers - Moms who blog have become important partners for many marketers -- but not just the moms who blog about motherhood and family issues. "Although blogs about parenting issues are the most common topic marketers think of when they hear the words 'mom' and 'blog,' in fact, the topics moms cover in blogs go far beyond that," said eMarketer senior analyst Debra Williamson. About 12.1 percent of all online moms in the U.S., or 3.9 million women with children under 18 write blogs, the firm reported. While many of them blog about parenting, most write about a range of subjects, from parenting to couponing to travel, automobiles or personal technology -- all of which is highly influential to the nearly 33 million moms who go online in the U.S., Williamson said. "While they share one thing in common -- having children -- they are a diverse group," she said. "This diversity is both a benefit and a challenge for marketers; creating a strong blogger outreach program takes time, effort and nurturing."  <Brandweek>

Hedgeye Retail’s Take: While 12% doesn’t sound all that impressive, one could argue that the ‘mom’ shopper network is even more influential and more importantly sticky relative to their tech-savvy children. Smart retailers don’t forget who ultimately allocates the pocket book at the store. 


R3: DEST, KSS, NKE, and WMT - R3 9 30 10



Driving Force Behind e-Commerce Growth - Affluent consumers are the primary shoppers for many different online product categories and retailers, and their influence on ecommerce sales in general is heavy. Households with incomes of at least $100,000 made up about a third of all US retail ecommerce spending in Q2 2010, but they also accounted for two-thirds of ecommerce growth in that quarter, according to comScore. “Marketers who sell high-end goods must understand how the shopping behavior and attitudes of affluent consumers are evolving,” said Jeffrey Grau, eMarketer senior analyst and author of the new report “Affluent Shoppers and Luxury Brand Retailers Online.”  <>

Hedgeye Retail’s Take: With many luxury brands still lacking sites that would be categorized as a superior online shopping experience, there is substantial opportunity for companies that step up to the plate. As more traditional luxury brands develop it will be interesting to see how the discount luxury site model i.e. Gilt Group, Rue La La, etc. evolves.  


R3: DEST, KSS, NKE, and WMT - R3 2 9 30 10


R3: DEST, KSS, NKE, and WMT - R3 3 9 30 10





TODAY’S S&P 500 SET-UP - September 30, 2010

As we look at today’s set up for the S&P 500, the range is 17 points or -0.59% downside to 1138 and 0.90% upside to 1155. Equity futures are trading lower.  Weak economic data hit Asia overnight (except China), while European markets retreated following Moody's downgrade of Spain, and after Irish regulators unveiled the cost of rescuing its financial system. Today's macro highlights include Q2 GDP and Initial Jobless Claims, followed by Chicago PMI.

  • Stericycle (SRCL) agreed to buy Healthcare Waste Solutions from Altaris Capital Partners for $245M
  • Synnex (SNX) sees 4Q EPS $0.94-0.97 vs estimate $0.90
  • VeriFone Systems (PAY) proposes to buy Hypercom (HYC) for $5.25 per share
  • Worthington Industries (WOR) reported 1Q sales of $616.8m, vs estimate $582m 
  • Xyratex (XRTX) forecast 4Q adjusted EPS $0.60-0.86 vs estimate $0.86


  • One day: Dow (0.21%), S&P (0.26%), Nasdaq (0.13%), Russell 2000 +0.33%
  • Month-to-date: Dow +8.19%, S&P +9.09%, Nasdaq +12.42%, Russell +12.54%
  • Quarter-to-date: Dow +10.86%, S&P +11.06%, Nasdaq +12.67%, Russell +11.17%
  • Year-to-date: Dow +3.91%, S&P +2.66%, Nasdaq +4.73%, Russell +8.35%


  • ADVANCE/DECLINE LINE: 299 (-872)
  • VOLUME: NYSE - 1012.19 (-1.28%)  
  • SECTOR PERFORMANCE: The on sector up yesterday was the XLE - the push and pull surrounding a number of high-profile themes continues including QE2 and the accompanying depressed interest rate environment and dollar weakness, European sovereign concerns, the quality of the September rally, regulatory overhangs, Chinese policy direction and protectionist risks.
  •  MARKET LEADING/LAGGING STOCKS YESTERDAY: Cabot Oil & Gas 5.19%, Range Resources +4.90% and Advance Micro +4.75%/Urban Outfitters -8.35,News Corp -2.94% and Kimco -2.72%
  • VIX: 23.25 +2.88% - YTD PERFORMANCE: (+7.24%)
  • SPX PUT/CALL RATIO: 1.42 from 2.36 -39.63%


  • TED SPREAD: 13.68, 0.203 (1.506%)
  • 3-MONTH T-BILL YIELD: 0.16%
  • YIELD CURVE: 2.08 from 2.11


  • CRB: 285.93 +0.56%
  • Oil: 77.86 +2.21%
  • COPPER: 366.15 +0.67%
  • GOLD: 1,309.88 +0.03% - up 6 days in a row


  • EURO: 1.3630 +0.38%
  • DOLLAR: 78.691 -0.41% - down for the last 5 days




  • European markets opened lower as bank capital requirements and sovereign credit were in focus
  • Ireland's central bank published its assessment of capital requirements for the country's banks, saying the restructuring of Anglo Irish Bank needs €29.3B in capital under base scenario
  •  Allied Irish Banks proposed an equity capital raising and asset divestments to fund its capital needs under the Capital Assessment Review
  • Spain's credit rating was downgraded to Aa1, outlook stable at Moody's
  • Major indices recovered from initial lows to briefly trade in positive territory
  • Germany Sep unemployment rate +7.5% vs consensus +7.6%
  • France Aug PPI +0.1% m/m vs consensus +0.2%
  • UK Sep Nationwide House Price Index +0.1% m/m vs consensus (0.3%) 


  • Asian Markets: Nikkei (1.99%); Shanghai Composite +1.72%
  • Most Asian indices traded lower following a weak US and poor Japanese economic data.
  • The FT reported Sinochem is struggling to mount a Potash bid
  • According to the Australian Financial Review Telstra plans to cut 6,000 jobs, or 15% of its workforce, over a three year period
  • Japan August industrial output (0.3%) vs consensus +1.1%
  • Japan Sep Manufacturing PMI 49.5 vs consensus 50.1


MAR should beat Q3 consensus next week. We remain concerned about the recent sequential slowdown in seasonally adjusted RevPAR, however.


Q3 may be the last quarter where earnings should be easily beatable for lodging companies.  We are projecting MAR to report $0.24 of EPS and $242MM of EBITDA, exceeding guidance and beating consensus numbers handily.  However, we do expect guidance to remain unchanged.  At $0.34, our Q4 estimate is $0.02 below the Street, which should be in-line with management’s unchanged 2010 guidance.


Our projections are based on recent absolute dollar RevPAR, adjusted for seasonality and GDP growth.  We’ve seen a seasonally adjusted sequential slowdown in RevPAR since the “pent up” period of May-July.  Based on this analysis, we think industry upper upscale RevPAR growth will be only in the 3-4% range in 2011.  Q1 2011 should be strong but Q2 and Q3 may be in the 0-2% range, owing to the difficult comparisons.  For MAR, our 2011 EPS estimate of $1.29 remains below the Street's $1.39.



3Q2010 Detail

  • WWW RevPAR of 8%, at the high end of company guidance (6-8%)
  • Total Owned, Leased, Corporate Housing and Other Revenue of $236MM and gross margin of $16MM – above guidance of $10MM
    • Includes $19MM of branding fees, and $2MM of termination fees
    • $95MM of owned & leased room revenues, up 9.4% YoY
    • 5% increase in food, beverage and other revenues
  • Total fee revenue of $263MM, compared to guidance of $245-255MM
    • Base management fees of $127MM, up 9% YoY
    • Incentive fees of $29MM, up 30% YoY
    • Franchise fees of $114MM, up 14% YoY
  • Timeshare segment results of $34MM, at the upper end of guidance ($30-34MM)
    • Contract sales of $184MM
    • $52MM gross margins on timeshare sales and services, net
  • Other stuff:
    • G&A: $150MM compared to guidance of $155MM (easy place to build in some cushion)
    • $5MM of gain and other income – in line with guidance
    • $39MM of net interest income, $1MM below guidance
    • A loss of $3MM for equity earnings


The Macau Metro Monitor, September 30th 2010


Singapore's Casino Regulatory Authority (CRA) said it has received license applications from junket operators endorsed by Resorts World Sentosa.  There was no information on the number of applicants or when licenses will be granted.



As Golden Week approaches, surveys show hotel room rates up 10-15% YoY.  For the first two weeks in October, hotel occupancy rate will exceed over 90%.



Not to repeat the chaos that erupted from Galaxy's previous recruitment fair in March, the Labour Affairs Bureau (DSAL) will coordinate with Galaxy regarding the job interview arrangements for Galaxy Macau.  Galaxy has started to advertise in local newspapers and also launched a career website.  However, director of the DSAL, Shuen Ka Hung told reporters that the bureau had not yet received a notification from Galaxy about staging a mass recruitment drive or the date of the event.



China's government has canceled certain property tax breaks. The reduced real-estate transaction tax of 1% will no longer apply to individual first-home buyers if their family members already own one or more homes.  To stem speculation, the government also canceled individual income tax breaks for those who buy a new home less than one year after selling a home.

The Incorrigible Hand

“A government big enough to give you everything you want is a government big enough to take from you everything you have.”
-Gerald Ford [Address to a Joint Session of Congress - August 12, 1974]


In yesterday’s Early Look, Keith said “I haven’t considered a heightening probability of a US stock market crash in an Early Look note since 2008.”  After reading that all I could think about was 1987 and a very difficult Friday in October.  We have five Fridays in October this year and I, for one, am concerned about all of them!


The current backdrop:


First catalyst - The Incorrigible Hand:

  • A financial bubble fueled by easy money and loose credit bursts  
  • Unemployment rises and GDP growth slows 
  • The misguided in Washington blame foreigners for unfair trade practices and pass a trade bill   
  • Thus sending the country into further economic weakness

Some elder Americans have seen this movie before.  The rest of us can read about it.  The fragile state of our economy, which the data is speaking to daily, is not lost on Main Street America.  In Washington, politicians are posturing accordingly.  Schumer and friends are spitting fire about China’s “economically injurious behavior” and the need for action against the “currency manipulators” in the form of a trade tariff on Chinese imports.  Look no further than the Smoot-Hawley tariff act of 1930 for an example of what such action may result in for this country.  Despite a petition signed by over one thousand economists requesting a presidential veto, this law was signed into effect and many believe exacerbated the Great Depression.


Yesterday, the House of Representatives passed H.R. 2378 or the Currency Reform for Fair Trade Act.  If it becomes law this year (which is unlikely given the mid-terms and that the Senate is only in session for a few more days), the bill would give the Obama administration the power to raise tariffs on imports if the Commerce Department determines that an exporting country is manipulating its currency.


The refusal to yield to common sense on the part of those pushing this bill is beyond belief; you can’t make this stuff up.  The CBO released a report showing that the new tariffs would raise only $20 million versus the billions in trade we do with the Chinese.  Thinking we can legislate the YUAN higher is just lunacy.


Second catalyst - the Financials are at risk:


According to our Financials analyst Josh Steiner, certain Financials are setting up to be a great short.  In his note yesterday he said “this is the third time this year that we've written a note on high yield and its relationship/implications for the XLF. High Yield is knocking on the door of its YTD highs once again; the index peaked at 8.19% on April 29th, 8.28% on August 3rd and closed two days ago (September 27) at 8.24%. Following those first two peaks in high yield, XLF dropped 18% and 10%, respectively over durations of 64 and 23 days.“


Third catalyst - the cost of bailing out the European mess is on the rise:


Europe’s woes continue, whether the eyes of the manic media are focused on them or not.  Ireland’s government has injected 30 billion euro into Anglo Irish Bank since January 2009 and estimates that 11.4 billion euro in additional liquidity may be required.  Another lender, Allied Irish Bank, is also set to receive government funding bringing the total cost of Ireland’s bank bailout to as much as 50 billion euro ($68 billion).  In addition, the country's budget deficit will balloon to 32% of GDP this year.


Fourth catalyst - Fridays ISM print:


Once again, we are looking at a Friday in October as bonds signal trouble and stocks levitate.  I understand that the economic backdrop of the crash in October 1987 was very different, but it’s still all about interest rates, the dollar and budget deficits.  This time, the “emergency” level of rates is not helping to stimulate the economy as intended. 


Tomorrow the ISM manufacturing index for September will be reported.  The August reading of 56.3 posted a big upside surprise versus expectations of 52.8, setting off a 9.09% rally in the S&P 500.  Since then, Factory orders, ISM non-manufacturing, Empire Manufacturing, Philadelphia Fed, Chicago Fed and the Dallas Fed have all reported disappointing numbers relative to expectations.  All of the regional FED readings, except the Empire State manufacturing reading, are showing September numbers that imply economic contraction, not expansion. A reading below 50 on the ISM is in play for the first Friday in October.


We believe that the fundamentals are pointing to the downside and the catalysts outlined above highlight some key risks to be aware of.  With many close races in the November elections, pointing fingers at others is the favored position in D.C. Rest assured, government’s Incorrigible Hand will be in action.  There are historical precedents for this kind of policy.  Looking at a more contemporary cautionary tale, Japan, is also instructive.  We will be exploring the lessons to be learned from Japan’s experience next Tuesday, October 5th when the Hedgeye Macro team hosts the 4Q10 Macro Themes conference call (email if you are interested in the call).  The three themes are:


(1)    Japan’s Jugular  - Japan got rocked last night, down 1.99%, now down 11.6% YTD.

(2)    Krugman’s Kryptonite - comparing our Japan conclusions to academic dogma about debt financed deficit “stimulus”, and deconstructing  Paul Krugman’s math.

(3)    Consumption  Cannonball  - The Incorrigible Hand strikes again!


Function in disaster; finish in style


Howard Penney


The Incorrigible Hand - obama schumer

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