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R3: Adi, LIZ, and Credit Card Fees


October 5, 2010


Expect the Visa/Mastercard settlement to facilitate changes at the POS.  It’s likely that consumers will see small discounts or rebates in return for using a particular form of payment.  With Discover representing the lowest cost credit card provides, we wouldn’t be surprised to see lower prices at retail for those using the card built on giving cash back.




- Ked’s is entering the sustainable shoe game with a version of it’s classic sneaker made from organic cotton.  The line, called Organic Champions, is also comprised of stitched eyelets and tea-stained laces.  Sounds like Ked’s may be looking to emulate a little bit of Tom’s success.


- On average American’s aged 12-24 spend two hours and fifty two minutes on the internet per day, about 5 minutes longer than the same group spends watching TV.  Playing video games is also a big part of this demographic’s daily routine, with an hour and ten minutes devoted to that activity.


- Keep an eye on where retailers are spending advertising/marketing dollars. According to an AdweekMedia/Harris Poll, 75% of Americans are reportedly confused by ads on television. In what might suggest marketers are getting too cute with their creativity, this study supports that retailers should consider further diversifying advertising channels toward mediums such as e-commerce, mobile, or even good old fashion print.


- As the “private” online sale becomes more mainstream, new e-commerce players are evolving with new twists.  Enter Birchbox, a new beauty e-commerce site which sends consumers a box of oversized product samples monthly for a fee of $10.  The consumer can then purchase the full-size product at Birchbox after having tested it.  The site also offers loyalty points as well as original editorial content.





Adidas Outdoor Selects Sales Groups to Represent Brand as it Enters the US Next Fall - Adidas Outdoor, which will enter the U.S. market next fall, has selected two more rep agencies. The Hartford Sales Group will represent the brand in California, Arizona and Nevada and RCP Pursuits landed the account in the Hawaiian Islands. <sportsonesource.com>

Hedgeye Retail’s Take: Adi’s new outdoor product is still a year away from hitting shelves, but the company’s decisiveness will give these seasoned agencies plenty of time to educate accounts and work initial shelf allocations come its U.S. launch in Fall 2011.


New Balance Reorganizes Specialty Sales Organization - New Balance announced that effective January 3, New Balance will reorganize the company's Specialty Sales Organization in an effort to accelerate business results in the distribution channels of New Balance stores, family shoe, and running specialty. Highlights of these changes include the launch of a New Balance Store and Family Shoe Specialist organization as well as a stand-alone Running Specialty Team. <sportsonesource.com>

Hedgeye Retail’s Take: With mid-single digit share in athletic footwear and increasingly more innovative product in the market from competitors, we haven’t seen much out of New Balance recently – something that will have to change in order for these segmented sales teams to have a chance both maintain and gain share.


Kate Spade to Make UK Retail Debut - US womenswear label Kate Spade will open a pop-up shop in Covent Garden in London this month.  <drapersonline.com>

Hedgeye Retail’s Take:  Kate Spade has a lot going on besides growing profitability and continuing to deliver positive comps. Its launching new fragrances, expanding internationally, targeting Brazil and China, signed a JV with Japan, and is testing its Jack Spade concept. These are small but meaningful.


Golfsmith Looks To Drive Sales With An App - If a golfer runs out of balls or tees at the end of 18 holes, he can type in Golfsmith.com in his mobile phone’s web browser and buy more. However, golfers with iPhones can now access a richer Golfsmith mobile experience through the retailer’s new iPhone app. Golfsmith has designed the app with m-commerce technology provider Digby to make researching and purchasing products and accessing promotions much easier. The mobile app offers rich features including a special flash sales promotions board and product demonstrations by Golfsmith product experts.  <internetretailer.com>

Hedgeye Retail’s Take: Bad news for those courses which discourage use of cell phones during play. 


Beyonce's Mom Expands Line at Select Wal-Marts - Tina Knowles, mother of recording artist Beyonce, is rolling out 30 new sportswear pieces for her exclusive line this month at select Walmart stores and Walmart.com. Miss Tina by Tina Knowles, which originally launched in August 2007, includes denim, graphic T-shirts, embellished tops, day dresses, tunics, jackets, leggings and track suits. The line retails for $20 and under. Knowles is also founder and co-director of the House of Dereon and Dereon. <licensemag.com>

Hedgeye Retail’s Take: In the midst of a major merchandising transition, it appears that Beyonce’s Mom remains a winner at Wal-Mart.  Unfortunately this line isn’t going to move the needle as the overall apparel strategy remains in limbo.


China Shoe Consumption to Double - Footwear consumption in China will double in the coming years, according to the China Leather Industry Association (CLIA) president Zhang Shu Hua. Speaking at the All China Leather Exhibition in Shanghai, Zhang said that although official figures are hard to put together, her organization estimates that Chinese consumers buy an average of 1.5 pairs of shoes each per year. She added that this was likely to double, which means that the global footwear industry will soon have to find a way of supplying China with an extra 2 bn pairs of shoes a year. <fashionnetasia.com>

Hedgeye Retail’s Take: If true, supply will begin to command increases in pricing.  Yet another reason to keep an eye on inflation, although this trend would certainly be longer-term in nature. 


Credit Card Rules Change - Visa Inc. and MasterCard Inc. agreed today to allow retailers to offer rebates to consumers who use a lower-cost payment form, for example, a debit card instead of a credit card, or a credit card that does not offer rewards and thus does not cost the merchant as much to accept. The two big card brands announced they were making the changes as part of a settlement of a lawsuit filed today in federal court by the U.S. Department of Justice against Visa, MasterCard and American Express Co. American Express refused to settle and say it will contest the lawsuit. It remains to be seen how much online retailers will benefit from this settlement. Some say it will free online retailers to accept payment options such as PIN-debit should such systems gain traction, and will open up competition in the burgeoning field of mobile payments. Others are skeptical that any online retailers will find it worthwhile to steer a shopper to a lower-cost card, at least for a single purchase. <internetretailer.com>

Hedgeye Retail’s Take: Expect to see low cost provider, Discover, making a push at the POS as well as retailers offering % discounts tied to certain payment forms in a near future. 


US Retailers Upbeat on Holiday Comps But Hesitant on 2011 Inventory - Major U.S. retailers are entering the holiday shopping season with much more optimism, according to the latest BDO USA, LLP Retail Compass Survey of CFOs. The survey found a much lower percentage of CFOs expect negative comps. CFOs are split over whether too much inventory (53%) or insufficient inventory (47%) presents a greater threat to their holiday sales. Despite keeping a close eye on inventory, nearly half of retail CFOs (42%) plan to measurably increase inventory purchases in the first half of 2011. Others are holding off – 16% are delaying planned increased inventory purchases until the second half of 2011, and 24% are waiting to increase inventory until 2012 or later. Only 17% of CFOs plan to increase their inventory levels during the 4th quarter of 2010 in time for holiday shopping.  <sportsonesource.com>

Hedgeye Retail’s Take: Despite an uncertain demand environment, we agree that there are very few retailers placing aggressive bets on inventory as a means to drive sales.  Promotional activity still remains a wildcard.


Italy's Leather Goods and Accessories Sector Bouncing Back - After almost two years of decline, Italy’s leather goods and accessories sector appears positioned to begin bouncing back. The favorable indicators include stores that are rebuilding inventories amid growing international demand, said industry executives attending Mipel, the four-day leather goods and accessories show. Signs of improved sentiment are stronger now than they were in March and companies from Russia are placing larger orders. The trade show drew 16,200 visitors, flat compared with the March edition, but a 13.6 percent boost versus the same period last year, organizers said. About half of those attending came from abroad. Exhibitors said buying interest from China and Korea was significantly improved compared with last year, and orders from the U.S. over the same period were slowly picking up, helped by a weaker euro. <wwd.com/business-news>

Hedgeye Retail’s Take: Perhaps another sign of recovery on the higher end of the price point spectrum as Italy tends to produce goods in less price sensitive niches.    



The Macau Metro Monitor, October 5th 2010



On October 3rd, 126,700 people arrived in Macau via Zhuhai-Gongbei central cross border, of which 58,700 were traveling visitors.  Meanwhile, the occupancy rate for 3-star hotels was 99.91%, 4 star hotels 96.37%, and 5 star hotels 99.08%.



Michael H. Chen has left his position as President for Asia for the American gaming giant Harrah's Entertainment Inc. and started a sabbatical year on October 1.  "I was offered a position in Las Vegas at Harrah's which is great but I need some time off and they agreed to it", said Chen. Chen was responsible for the development of Harrah's business in Asia and had served as a corporate director and executive associate to the chairman, president & CEO, Gary Loveman.

EARLY LOOK: Japan's Jugular


“Great spirits have always encountered violent opposition from mediocre minds.“

-Albert Einstein


EARLY LOOK: Japan's Jugular - Einstein





I am currently in the middle of reading Walter Isaacson’s “Einstein: His Life and Universe.” For a young chaos theorist fighting the winds of Washington and Wall Street Groupthink, Einstein’s independence of thought is highly motivating.


Chaos and Complexity Theory are the most important mathematical discoveries since Einstein’s General Theory of Relativity. While we don’t give out our mathematical models here in New Haven, we distribute both their factors (inputs) and themes (outputs).


Like any other dynamic ecosystem in this universe, global markets are constantly changing. As a result, analyzing time, space, and gravity are seemingly rational places to start each and every risk management morning. Trivial points in time like a price-to-earnings ratio are what they are – of very little value to our research.


At 2PM EST today we’re going to introduce the 3 global macro risk management themes that we think will matter most to global investors in the 4th quarter of 2010 (if you are a qualified investor and would like to sign up for the call, please email ).


For Q4 2010 our Hedgeye Macro Themes are as follows:


EARLY LOOK: Japan's Jugular - 0 q4 THEMES


In sharp contrast to other “top-down” or “global macro” oriented sell-side research that calls everything “long-term”, we focus acutely on time (duration) and space (price). It’s all good and fine to come up with a “long-term” investment thesis (been there, tried that), but if you get time and price wrong, you’re best advised to get a job in academia.


I don’t disrespect academia. I just don’t want my firm, family, or country’s risk management system overseen by academics. Einstein himself would be the first to call out the long-term career risk associated with academic dogma. As markets evolve, we need to evolve the risk management process alongside them.


Living in the violent opposition of mediocre industry standards is one of the tremendous investment opportunities in global finance today. Schumpeter called this creative destruction. God bless the learning opportunities that are born out of the failures of Fiat Fools.


Unfortunately, Washington and Wall Street Groupthink doesn’t get this yet. Neither do the Japanese Bureaucrats who continue to believe that the best way to solve for structurally impaired economic growth is to throw more failed government policy action at the problem.


We’ll go through the why on this with a 68 slide presentation this afternoon, but the bottom line is that what you are seeing from Japan this morning is ultimately an admission that QE (Quantitative Easing) didn’t work.


In fact, after cutting interest rates from ZERO POINT ONE percent (0.10) to ZERO POINT ZERO percent (0.00), the most recent edition of a Japanese Heli-Ben (BOJ Governor Shirakawa) dropped the QE acronym altogether for a new one – CME (Comprehensive Monetary Easing).



EARLY LOOK: Japan's Jugular - japanchart



The best part about CME versus the QE that is sponsored by “New Keynesian Economics” academic dogma (Bernanke, Krugman, Stiglitz, etc.), is that I can actually understand what CME means. It’s very “comprehensive” to see that the Japanese can’t cut interest rates (until they raise them) again.


I’m certain Einstein would be a fan of CME. When failed ideologies like QE meet their maker of gravitational force, the next best step for a failed academic is to stop what they are doing. Then either retire, or change as the facts have. After all, it was Keynes himself that would be asking “New Keynesians”, what do you do now Sirs?


My immediate term support and resistance lines for the SP500 are now 1126 and 1144, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer

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Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.


While there is a decent amount of literature available for investor consumption on the topic of iGaming, we thought some cliff notes on the topic could be helpful.  Look for more detailed notes in the near future.



We think some form of legalized internet gaming in the United States is inevitable.  While it will likely be a couple of years before it's commercial, investors could begin to discount this potentially large opportunity so we are going to start talking about it.  Poker is where it will all likely start (or should I say resume).  Given its critical mass of players, PartyPoker seems to have a competitive advantage in reentering the US.  For the "brick and mortar" guys, Harrah's with its World Series of Poker seems best able to capitalize.  We will have more on these topics in upcoming posts. 



Here are the cliff notes:


Why is iGaming interesting?

  • Aside from Macau and Singapore, iGaming is one of the few subsectors in gaming that’s actually been growing. According to H2GC, the online gaming market has grown at a 23% CAGR from 2001-2008 to an estimated size of $22BN in 2008 and expected to reach $34BN by 2012.  In 2008, internet gaming accounted for 7% of the global gaming market.

What are the forms of iGaming?

  • In 2008, sports betting comprised the largest slice of the iGaming market with $10BN of revenues, followed by casino online gaming, poker and lastly bingo

iGAMING: "CLIFF NOTES" - igaming1


What are the biggest iGaming markets?

  • Even though internet gaming is illegal, US is still the single largest gaming market, estimated at roughly $6BN in size today
  • Regionally, Europe is the largest iGaming market, followed by Asia and North America

iGAMING: "CLIFF NOTES" - igaming2


Who are the players in the space?

  • Some of the public market igaming players include:
    • Partygaming/Bwin
    • Sportingbet
    • 888
    • Unibet
    • Playtech
    • Betsson
  • There are also a host of private companies, like Betfair (seeking IPO), Full Tilt Poker and PokerStars

iGAMING: "CLIFF NOTES" - igaming3


TODAY’S S&P 500 SET-UP - October 5, 2010

As we look at today’s set up for the S&P 500, the range is 18 points or -0.97% downside to 1126 and 0.61% upside to 1144. Equity futures are trading above fair value in the wake of the Bank of Japan's decision to cut its interest rate to almost zero and announced intentions to set up a ¥5TN QE fund to increase liquidity in its financial system. Today's macro highlights include; September ISM Non-Manufacturing Index and related sub-components.

  • Chevron (CVX) said it will begin buybacks in 4Q under previously announced repurchase program
  • Equifax (EFX) completed purchase of Anakam on October 1; terms not disclosed
  • First Midwest Bancorp (FMBI) said CEO Thomas J. Schwartz plans to retire by 1Q 2012
  • MaxLinear (MXL) gave preliminary 3Q revenue forecast $18.4m-$18.6m vs previous $20m-$20.5m forecast, estimate $20.3m
  • MEMC Electronic Materials (WFR) subsidiary SunEdison sold plant in Italy to First Reserve; sees total price EU276m 
  • Mosaic (MOS) posted 1Q EPS 67c vs estimate 71c


  • One day: Dow (0.72%), S&P (0.80%), Nasdaq (1.11%), Russell (1.45%)
  • Month/Quarter-to-date: Dow (0.37%), S&P (0.4%), Nasdaq (1.03%), Russell (0.97%)
  • Year-to-date: Dow +3.07%, S&P +1.94%, Nasdaq +3.31%, Russell +7.06%


  • ADVANCE/DECLINE LINE: -1347 (-2460)
  • VOLUME: NYSE - 943.71 (-11.99%)  
  • SECTOR PERFORMANCE: Every sector declined yesterday - European debt worries remain elevated as Ireland’s central bank cut growth forecasts for 2010 and 2011 and as the government’s budget proposal in Greece showed expectations of GDP contractions in 2010 and 2011.
  •  MARKET LEADING/LAGGING STOCKS YESTERDAY: Sara Lee 7.22%, Ford +4.73% and Wynn +3.93%/CCE -30.79, American Express -6.53% and Micron -4.12%
  • VIX: 23.53 -4.58% - YTD PERFORMANCE: (8.53%)
  • SPX PUT/CALL RATIO: 1.48 from 1.32 +12.18%


  • TED SPREAD: 17.40, 3.043 (21.199%)
  • 3-MONTH T-BILL YIELD: 0.13% -0.03%
  • YIELD CURVE: 2.09 from 2.19


  • CRB: 283.99 -0.60%
  • Oil: 81.75 -0.13%
  • COPPER: 366.40 -0.72%
  • GOLD: 1,314.70 -0.06%


  • EURO: 1.3691 -0.73%
  • DOLLAR: 78.44 +0.46%




  • European Markets: FTSE 100: +0.27%; DAX: +0.10%; CAC 40: +0.66%
  • European markets after a cautious open have moved higher.
  • Fixed income markets were initially helped by Bank of Japan cutting interest rates and setting up an asset purchase fund, though this was tempered by Moody's comments that they may downgrade Ireland's sovereign credit rating further.
  • EuroZone economic leaders met with China's Prime Minister and in a news conference indicated they had urged China to allow an orderly and broad-based appreciation in the yuan though say China doesn't share the regions view for quicker yuan appreciation.
  • Major indices moved higher supported by generally constructive revisions to the regions Services PMI data with financials amongst the leading gainers and all sectors trading up on the day.
  • French Sep Final services PMI 58.2 vs preliminary 58.8
  • Germany Sep Final Services PMI 54.9 vs preliminary 54.6
  • EuroZone Sep Final Services PMI 54.1 vs preliminary 53.6
  • UK Sep Services PMI 52.8 vs consensus 51.0 and prior 51.3


  • Most Asian indices ended the day higher after the Bank of Japan cut its overnight rate target to between zero and 0.1%, from 0.1% and announced that it will create a fund to buy JGBs and other assets. It will buy up to ¥3.5T ($42B) of long-term JGBs and Treasury bills within one year of beginning the fund and will buy approximately ¥1T ($12B) of commercial paper, asset-backed commercial paper, and corporate bonds within one year.
  • The Reserve Bank of Australia unexpectedly kept its cash-rate target unchanged at 4.5%. Many economists had expected the RBA to raise rates following a hawkish speech by RBA Governor Glenn Stevens last month. Shanghai markets are closed
  • Euro area urged China to allow an orderly, significant and broad-based appreciation of its currency and added the Chinese authorities do not share the same view

Howard Penney
Managing Director


THE DAILY OUTLOOK - levels and trends















HST should handily beat, as everyone knows, but the lack of a big forward guidance raise could disappoint



Host Hotels reports its 3rd quarter results on Oct 13th.  We are projecting $1,019MM of revenue, $159M of EBITDA and FFO of $0.13 - handily beating consensus numbers.  HST should modestly raise guidance for FY2010, which may imply in-line to slightly lower guidance for Q4.  We do think that the 3rd quarter will mark the last big beat and raise quarter. 


We’re below the street for most lodging company results starting in 2Q2011.  Our thesis is that the April-July period of 2010 benefitted from pent up demand and we've seen a sequential slowdown since July.  The seasonally adjusted dollar RevPAR figures for August and September support our thesis.  Q2 2011 RevPAR may actually turn negative.  Up until then, however, analysts' estimates look reasonable but full year 2011 looks high to us.



3Q2010 Detail:

*** Note our numbers aren’t same store

  • Property revenue of $949MM
    •   Room revenues of $627MM growing 8.2% YoY
      • RevPAR up 10.8% YoY to $120.09
      • Occupancy at 74.6% and ADR at $161.09
    • Food and beverage revenues growing 6% YoY to $257MM
    • Other revenues up 3% YoY to $66MM
      • We assume lower cancellation and attrition fees negatively impact this quarter’s results by $5MM
    • Rental income of $20MM; $60MM of revenues from leased select service hotels & office buildings and a $10MM charge for hotel sales for property which HST records rental income
    • $741MM of property level expenses, broken out as follows:
      • $179MM of room expenses, amounting to a 6% YoY increase and a CostPAR increase of 2%
      • $213MM of food & beverage expenses, representing a 4% YoY increase
      • $271MM of hotel departmental expenses
      • 2% YoY increase in other property level expenses to $78MM, which equates to a 1.9% CostPAR
    • Management fees of $39MM, increasing 18% YoY
    • $169MM of property EBITDAR
    • Rental expense of $14MM; $61MM of expenses from leased select service hotels & office buildings and a $10MM credit for hotel sales for property which HST records rental income
    • Other stuff:
      • $24MM of corporate expense
      • $138MM of D&A
      • Net interest expense of $82MM
      • $13MM of taxes
      • 675MM share count  for FFO calc

Daily Trading Ranges

20 Proprietary Risk Ranges

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.