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What Makes It So Hard

“What makes it so hard is not that you had it bad, but that you're that pissed that so many others had it good.”

-Melvin Udall


In 1997, Jack Nicholson won the Oscar for Best Actor for his portrayal of an obsessive-compulsive Melvin Udall in “As Good As It Gets.” Particularly for anyone who has ever lived and worked in New York City, this movie really resonated. It was human.


As the Street makes its final push into year-end bonuses, this Melvin quote may not speak as loudly to some of us, but it’s ringing loud and clear across America. How else could the US stock market have its best September in 71 years and US Consumer Confidence readings go DOWN month-over-month? While Americans may not know what “QE” means, they’re pretty sure they should be pissed about it…


Let’s set aside the Manic Media begging Bernanke for more of what he himself has no idea will perpetuate and consider 3 intended consequences that make this so hard for common sense people to accept:

  1. Debauchery of America’s currency.
  2. Record low rates of return on savings accounts.
  3. Economic stagflation.

Now now, don’t get all in a heat here if you are in the perma-deflation camp. At lower prices, we’ll be right there with you. For now prices are inflating. Last week saw gold hit another record high. Oil and copper prices were up another +6.7% and +2.2% week-over-week, respectively.


Consequence #3 is a direct function of the US Federal Reserve being willfully blind to points #1 and #2.


What makes this so hard is the truth.


The truth is that Americans don’t have to buy into Officialdom’s portrayal of the truth. In “A Few Good Men”, Nicholson’s character tried pulling rank by suggesting “you can’t handle the truth!” Sometimes the “authorities” on critical American matters are wrong about the definition of truth.


Americans know the truth. Americans don’t like being lied to. The truth is marked-to-market on their desktop and in their bank accounts every single minute of the day.


For the 1st week in the last 5, the SP500 was down last week. It was barely down, but the point is that it was down. My submission on why is very straightforward. The Burning Buck starts to morph into a very bad thing, turning reflation into inflation, at a price.


Now slowing US economic growth + accelerating inflation growth = economic stagflation for those countries who have a higher nominal rate of inflation than they do economic growth. For countries that have to implement austerity measures, this problem will compound itself by real-wage growth starting to go negative year-over-year. The only thing worse than not having a job is getting a pay cut.


Back to a real-time update on the intended consequences of Bernanke’s plan:

  1. US Dollar = down another -1.64% last week; down for the 15th week out of the last 18; and down -11.8% since June!
  2. US Treasury Yields = down another -6.8% last week to 0.41% 2-yr yields; and down again this morning to a record low 0.40%

Again, that’s just the truth. And the truth is that a country has never devalued its way to prosperity. Sure, in the short term, inflation makes this good for some of us. But, in the long run, some of us need to remember that it’s the rest of us that matter most.


My immediate term support and resistance lines for the SP500 are now 1141 and 1155, respectively. I currently have a 52% position in Cash in the Asset Allocation Model (down from 55% on Friday as I added a 3% position in corn). In the Hedgeye Portfolio, I’ve moved to 13 long positions and 11 shorts.


Best of luck out there this week,



Keith R. McCullough
Chief Executive Officer


What Makes It So Hard - 2yryield


TODAY’S S&P 500 SET-UP - October 4, 2010

As we look at today’s set up for the S&P 500, the range is 14 points or -0.46% downside to 1141 and 0.76% upside to 1155. Equity futures are trading below fair value in a subdued start to trading in a week which is likely to be dominated by the start of the Q3 earnings season, Friday's employment data and speculation surrounding the timing of any fresh QE.  Today's macro headlines include: August Pending Home sales and Factory Orders.


  • AT&T (T) agreed to pay $300m to the IRS in 4Q to settle disagreement over 2008 tax return
  • Dynamex (DDMX) agreed to be bought for $21.25 per share by Greenbriar Equity Group; 58% premium to average close over past 30 days
  • Icad (ICAD) filed to sell as much as $75m in common stock
  • Iridium Communications (IRDM) settled lawsuit filed by Motorola in February 2010; terms not disclosed
  • Barron’s - JPMorgan (JPM) may boost dividend next year and rise as much as 45% during next two years
  • Sunday Telegraph - New York Times (NYT) plans to pay back $250m loan from Carlos Slim three years ahead of schedule
  • Prudential Financial (PRU) got a term loan of as much as $3b to finance purchase of AIG Japan units
  • Barron’s - Snap-On (SNA) may rise as overseas automobile-repair growth boosts sales
  • Barron’s - United Technologies (UTX) may rise as much as 20% during next year on demand for elevators and escalators, improved profit at carrier air-conditioning unit
  • WD-40 (WDFC US) boosted Q dividend by 8% to $0.27 per share
  • Barron’s - World Wrestling Entertainment (WWE) may decline as fans increasingly turn to mixed martial-arts rival Ultimate Fighting Championships instead


  • One day: Dow +0.39%, S&P +0.44%, Nasdaq +0.09%, Russell +0.47%
  • Month/Quarter-to-date: Dow +0.39%, S&P +0.44%, Nasdaq +0.09%, Russell +0.47%.
  • Year-to-date: Dow +3.85%, S&P +2.79%, Nasdaq +4.48%, Russell +8.62%


  • ADVANCE/DECLINE LINE: 1113 (+1047)
  • VOLUME: NYSE - 1072.22 (-16.45%)  
  • SECTOR PERFORMANCE: Outsized strength in energy, materials and financials; tech lags as the space missed out on the afternoon rally.
  •  MARKET LEADING/LOOSING STOCKS YESTERDAY: Citi 4.87%, Metro PCS +4.49% and Freeport MC +3.38%/Tenet -4.03,Abercrombie -3.99% and Sears -3.35%
  • VIX: 22.50 -5.06% - YTD PERFORMANCE: (+3.87%)
  • SPX PUT/CALL RATIO: 1.32 from 1.72, -24.96%


  • TED SPREAD: 13.75 -0.304 (-2.166%)
  • 3-MONTH T-BILL YIELD: 0.16%
  • YIELD CURVE: 2.12 from 2.11


  • CRB: 285.69 -0.41% - first down day in seven
  • Oil: 81.58 +2.01% - up 6.65% last week
  • COPPER: 369.05 +1.07%
  • GOLD: 1,315.55 +0.61%


  • EURO: 1.3791, +1.25%
  • DOLLAR: 78.08 -0.80% - down 1.65% last week




  • European markets: FTSE 100: (0.70%); DAX (1.20%); CAC 40 (1.28%)
  • Major indices are weaker in a quiet start to the trading week with all sectors showing losses although Autos are underperforming (2.4%) amid speculation that improving economic data will reduce the need for governments to stimulate growth
  • Sanofi goes hostile in bid for Genzyme
  • Chinese Premier has restated that they do not intend to reduce their holdings of European government bonds
  • Eurozone Aug PPI +3.6% y/y vs consensus +3.6%



  • Asian markets: Nikkei (0.25%); Shanghai Composite (closed)
  • Markets were mixed in a follow-through to Friday's US data, but volumes remain light on account of the holiday in China.
  • The Nikkei initially traded lower, but finished the morning session higher as the euro strengthened vs the yen before giving back some earlier gains during the afternoon session.
  • The Hang Seng, which was closed Friday, saw resource stocks advance with higher commodity prices and property stocks higher after strong weekend sales 

Howard Penney


Managing Director 


THE DAILY OUTLOOK - levels and trends













WMT: Dispelling Analyst Day Hype

Wal-Mart’s analyst day is likely to yield less information about merchandising strategy and vendor pricing than in years past – at the precise time it’s needed most.  Furthermore, a smaller format urban location is likely to be more of a test than anything else- at least for now. There are simply too many new executives in new roles to have made any tangible progress in the effort to reverse the negative same store sales trend. 



Wal-Mart is set to host its 17th annual investor/analyst meeting in Bentonville on October 12th and 13th and this year is no different than year’s past. There’s much speculation brewing about what the world’s largest retailer is going to say and reveal.  This year’s topic du jour likely centers around two main areas, domestic store growth in the form a smaller, urban concept and a revamped merchandising strategy.  The former speculation arises out of ominous comments made from newly appointed Wal-Mart U.S CEO Bill Simon at a recent investor conference. 


Recall that Simon was quoted as saying, “We have lots of learnings around the world from Wal-Mart in small formats. Our group in Mexico and Central America, Latin America operates small formats very well and very profitably, and we are going to beg, borrow, steal and learn from them as quickly as we can, because it is important for our urban strategy.”   This in turn has led the media and some on the Street to expect a multi-hundred unit rollout of some convenience/grocery/dollar store hybrid in urban centers across the country.  We do not believe this will be the case.  While it possible that some new, smaller format (i.e 20k feet or less) will be announced, we believe it will only be in the context of a test or prototype.  History reminds us that both the Supercenter and Neighborhood Market were tested for several years before Wal-Mart made a full commitment to the format.  In fact, the Neighborhood Market is still more of a test than a viable growth contributor for the company.  We believe it is overly optimistic to expect an acceleration in U.S square footage growth in the near-term driven by a new and yet unnamed small store format.


Secondly on the topic of merchandising.  There is no question that Wal-Mart’s negative same store sales are in some part suffering from its unsuccessful efforts to drive purchases of non-consumable goods.  The leadership at the company has been in flux since June and has still yet to settle into their new roles.  Just this week alone, a CFO transition was announced, replacing a 10 year veteran with an internal promotion.  The names and faces of the executives coming and going is largely irrelevant in the near-term.  It’s not who is moving up and who is moving out, but rather that the world’s largest retailer is seemingly scrambling to make leadership changes in an effort to reverse the negative trend.  Change can be good, but it can also be unsettling in the near-term.  We do not believe that WMT will show (or convince) the Street that its merchandising strategy is fully baked and working at its meeting in Arkansas.  There are simply too many new faces in new roles for one to put forth a credible and cohesive strategy on such short notice.  Furthermore, it is highly unlikely that the suppliers and manufacturers could even produce enough product to meet WMT’s demands in such a short time before the holiday shopping season approaches.  If there is one thing we know, retailers of all sizes do not use the November/December time frame for taking big risks or making big, unproven changes.  Therefore, we’d expect the meeting to be centered on the “long-term”. Changes made in the next six months will impact the subsequent year.  We anticipate that this will be a long, drawn out process and one that still remains unproven.


Take a look at the following major management changes that have taken place since June alone:


  • 9/29- CFO promotion announced.  Former CFO, Tom Schowe, leaving company after 10 years.
  • 9/3- U.S CEO Bill Simon announces Chief Merchant position will not be filled.  Instead the company will operate with four merchants reporting to Simon.  Each one is responsible for a particular category.
  • 7/3- Chief Merchant John Fleming resigns a few days after new U.S. leadership is announced.  Role initially filled by two merchants on an interim basis.  Eventually each of these merchants is named to the team of four that replace Fleming on a permanent basis.
  • 6/29- Bill Simon, former COO of U.S, named to U.S. CEO role.  Replaces Eduardo Castro Wright who remains Vice Chairman and becomes head of Global.com and supply chain.  Castro Wright relocates to California.  COO role remains vacant.
  • 6/9- EVP/Corporate Secretary retires.  Position is filled by General Counsel, who assumes the additional role.   Ethics and global security responsibilities attached to Secretary role are reassigned within the organization.


The chronology above does not even scratch the surface of all the tertiary role changes within the U.S organization.  The bottom line here is that change is surely underway led primarily by people in new roles and an underlying approach which leaves nothing sacred.  For those expecting any major changes in top or bottom line results in the near to intermediate term, we caution that this is highly unlikely.  There simply has not been enough time yet for which the new team could have crafted and executed a revised merchandising strategy.  At best we believe this is 6 months out – but even then we need flawless execution.  So the many people that will attend the meeting looking for derivative plays out of suppliers will be also be disappointed. The same goes for insight on Wal Mart’s stance on passing through raw materials costs to customers and vendors. Expect less information than in the past (at the precise time when it is needed most). In the near-term those expecting some major announcements out of the investment meeting are also likely to be disappointed.  The strategy is still not defined, nor are the architects fully in place.


Eric Levine


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Athletic Footwear - Confirming the Trend

Athletic footwear sales up +8.3% on a trailing 3-week basis on a +4.8% comp confirms just how strong the trend is as we head into Q4. More importantly, with tough comps now in the rear-view, the outlook over the intermediate-term looks increasingly favorable. Despite what appears to be diverging trends between both footwear and retail sales according to ICSC and apparel, the underlying trends in all three remain positive on a trailing 3-week basis. Nike (both Brand and Jordan), Reebok, and Saucony all continue to outperform.


Have a great weekend.



Casey Flavin




*Note: due to system upgrades at our service provider, the release of footwear data was delayed until today. It will return to a normal Wednesday release schedule next week.


Athletic Footwear - Confirming the Trend - FW App Industry Data 1yr 10 1 10


Athletic Footwear - Confirming the Trend - FW App Industry Data 2yr 10 1 10


Athletic Footwear - Confirming the Trend - Fw App Ind Data 1 10 1 10

Athletic Footwear - Confirming the Trend - Fw App Ind Data 2 10 1 10


The Week Ahead

The Economic Data calendar for the week of the 4th of October through the 8th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.


The Week Ahead - cal1

The Week Ahead - cal2

Eye On Asia: The Good, the Bad, and the Ugly

Conclusion: The bevy of economic data out of Asia over the last 48 hours is both supportive of the bullish rally in many Asian equity markets and the relative underperformance of Japanese equities. What remains to be seen, however, is where do Asian equities go from here?


Position: Short Japanese Equities (EWJ); Short Japanese yen (FXY)


There has been a slew of economic data coming out of Asia over the last 48 hours – some good, some bad, and some ugly. Rather than belabor the point(s) with excessive prose, we’ll just highlight the meaningful deltas and inflection points in the call-outs and charts below.


The Good 

  • China PMI accelerated in September to 53.8 from 51.7 in August. Indexes of output, New Orders, and Export Orders all climbed MoM as well.
  • Japan Tankan Survey of Business Conditions improved in September. Large Manufacturer sentiment rose sequentially in 3Q10 to 8 from 1 in 2Q10 and Large Non-Manufacturer sentiment improved QoQ to 2 from (-5) in 2Q10. Sentiment hasn’t been this high since 1Q08 and 2Q08, respectively.
  • Japan Unemployment ticked down 10bps in August to 5.1%.
  • Japan PCE accelerated in August to +1.7% YoY from +1.1% YoY in July.
  • Japan Retail Sales accelerated in August to +4.3% YoY from +3.9% YoY in July.
  • Korean Industrial Production accelerated in August to +17.1% YoY from +15.5% YoY in July.
  • India Exports accelerated in August to +22.5% YoY from +13.2% YoY in July.
  • Thailand CPI decelerated in September to +3% YoY from +3.3% YoY in August.
  • Thailand Exports accelerated in August to +23.6% YoY from +21.2% YoY in July.
  • Indonesia CPI pulled back in September to +5.8% YoY from +6.4% YoY in August.
  • Taiwan raised its benchmark policy rate to 1.5% from the prior 1.375%. 

Eye On Asia: The Good, the Bad, and the Ugly - 1


The Bad 

  • China stepped up efforts to cool its property market. The latest batch of measures include a ban on extending loans to buyers of third homes, extending a 30% down payment requirement to all first-home buyers, and a withdrawal of an income tax exemption on profits from the sale of real estate reinvested within one year. China may elect to announce property taxes to residential properties should they feel the latest round of tightening is not effective.
  • Japanese consumption head fake? The sequential uptick in August retail sales was supported by last-minute demand for cars ahead of the expiration of a government incentive program, as well as purchases of air conditioners during the nation’s hottest summer in over a century. In a sign that these tailwinds are wearing off, Japan Registered Auto Sales rolled over in September to (-4.1%) YoY from +46.7% YoY in August. Further, Large Retailer Sales ticked down in August to (-1.9%) YoY from (-1.2%) YoY in July. The strength in the Japanese unemployment release is also to be taken with a grain of salt, as over 90,000 Japanese citizens dropped out of the labor force in August due to their inability to find jobs.
  • Japan CPI came in flat for September, staying at (-0.9%) YoY. Deflation continues. 

Eye On Asia: The Good, the Bad, and the Ugly - 2


The Ugly 

  • Japan’s strong yen woes continue: Nintendo, the world’s largest maker of video-game consoles, recently cut its profit forecast by 55%; Murata Manufacturing Co., the maker of a third of the world’s ceramic capacitors (devices used in flat-panel TVs and smart phones) has planned to lay off 3,000 of its 4,500 contract employees and to move production abroad with the goal of 30% overseas production by 2012. Further, the 3Q Tankan Survey release showed a sharp divergence between the Large Manufacturer 4Q10 sentiment forecast and the 3Q print: (-1) in 4QE vs. +8 in 3QA. Automakers in particular expect an even larger decline in 4Q to (-6) from the current +32  - the widest delta in forward expectations since the Bank of Japan started tracking confidence back in 1992!
  • Japan Industrial Production fell in August to +13.7% YoY from +15.8% YoY in July. On a MoM basis, production fell (-0.3%) from July, which surprised consensus expectations of a +1.1% gain. According to the Survey of Production Forecast in Manufacturing, Industrial Production is expected to decline (-0.1%) and (-2.9%) MoM in September and October, respectively. Shipments deteriorated further in August, falling (-0.5%) MoM vs. the (-0.1%) decline in July.
  • Japan PMI (Nomura) declined in September to 49.5 from 50.1 in August.
  • China’s PMI Input Price Index rose in September to 65.3 from 60.5 in August as raw material costs climbed (think: dollar down; commodities up).
  • South Korea CPI quickened in September to the highest pace in 17 months: +3.6% YoY vs. +2.6% YoY in August. Consumer prices rose +1.1% MoM from August, the biggest monthly gain since March 2003! Food and agricultural prices grew 21.1% YoY (think: dollar down; commodities up)
  • South Korea Manufacturer Confidence fell in October to 99 from 104 in September. This is the lowest level in eight months and reflects growing concerns over the confluence of the strong won and a slowdown in W. European and U.S. consumer demand for South Korean goods. Further augmenting this point, Non-Manufacturing Confidence actually increased in October to 86 from 85 in September.
  • South Korea Exports decelerated in September to +17.2% YoY from +29.6% YoY in August. 

Eye On Asia: The Good, the Bad, and the Ugly - 3


The Murky


The economic and company data above is both supportive of the bullish rally in many Asian equity markets, as well as the relative underperformance in Japanese equities. What remains to be seen, however, is where we go from here? With U.S. consumer demand prepared to tank in 4Q10 and 1Q11, Western European consumer demand potentially following suit, and the prospect for further strengthening in Asian currencies (Asia Dollar Index at a two-year high), do Asian equities continue to go straight up given the likelihood of sequentially deteriorating economic data over the next 3-6 months?


Consider the following stats: 

  • Exports account for roughly 40-45% of Asia’s GDP;
  • The U.S. and the E.U. combine for roughly a third of Asia’s export destinations;
  • 40-50% of intra-regional trade within Asia is basic and intermediate goods meant for re-export outside of the region. 

Given Asia’s leverage to a weakening U.S. and European consumer, we must ask ourselves whether Asian equities could correct meaningfully in the next 3-6 months based on the confluence of declining trade and equity market mean reversion. While we are not yet ready to make a call in either direction, we’d be remiss not to call out the downside risks.


Eye On Asia: The Good, the Bad, and the Ugly - 4


Lastly, as we see from the aforementioned China and S. Korea inflation data, Mr. Bernanke’s quantitative easing experiment continues to export commodity price inflation to the rest of the world, as dollar debasement results in appreciation of assets priced in dollars. No reason to make it any more complicated than that.


As always, time, data and more prices will guide our decision-making from here.


Have a great weekend,


Darius Dale



Eye On Asia: The Good, the Bad, and the Ugly - 5

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