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TALES OF THE TAPE

While last week was a great week for restaurant stocks, the looming cloud of food costs must be accounted for.

 

Quick service and casual dining stocks climbed 2.5% and 3.4%, respectively, over the week ended Friday.  Important news items going into this week include:

  • McDonald’s is bringing back the McRib on November 2nd for six weeks.  This is in line with MCD’s continuing approach of taking on competitors head on.  Its recent release of the burrito-sized Chicken Snack Wrap was clearly aimed at the Chipotle customer. Burger King has seen recent success with its “Fire-Grilled Ribs” and MCD will look to gain a share of that success with the McRib release.
  • Dine Equity signed a new $950 million senior secured credit agreement. 
  • Brinker International’s stock could climb about 25% in the next year, according to Barron’s article published this past weekend.
  • Surging corn and meat prices are driving costs higher for U.S. retailers.  The U.S. cattle herd in July was the smallest since 1973.  Beef is more costly at current prices than it has been in 25 years. 

TALES OF THE TAPE - stocks 1011

 

TALES OF THE TAPE - com1011

 

Howard Penney

Managing Director


R3: GPS, WMT, SHOO, MFB

R3: REQUIRED RETAIL READING

October 11, 2010

 

Fair amount of smaller events in the news today likely to be overshadowed by M&A announcements from last week. 

 

RESEARCH ANECDOTES

 

- Telluride became the first city in Colorado to the ban the distribution of plastic bags by grocers and retailers.  Recall that this trend has been gaining steam, with several other U.S cities including San Francisco, Brownsville, TX, Malibu, Fairfax, and Palo Alto all banning plastic.  In some cities like Washington, DC there is actually a nickel charge for each bag a consumer chooses to take.

 

- Expectations for Gap’s analyst meeting on Friday may be on the rise now the company’s logo change has been met with controversy. Gap’s president Marka Hansen noted that, “Our brand and our clothes are changing and rethinking our logo is part of aligning with that.”  After all, we’re pretty sure the logo change alone isn’t going to move the mall traffic needle.  There is definitely more to come from this story…

 

- With an increasing interest in ‘green’ products, the Federal Trade Commission has proposed revised guidelines for marketers in order better define and substantiate such claims as not to deceive consumers. In a surprisingly democratic move, the commission is soliciting public input until December 10th at which time it will make changes final. Given all the permutations of environmentally friendly product, material, and manufacturing, the commission may among those hiring into the holidays just to sort through the feedback.

  

 

OUR TAKE ON OVERNIGHT NEWS 

 

SHOO Upped Betsey Johnson Investment - Steve Madden, who has upped his investment in Betsey Johnson LLC from covering her credit debt to buying her trademarks, has no plans to make major changes. Last month Steven Madden Ltd. took over a $48.8 mm loan to Johnson’s firm and has since absolved the loan in exchange for ownership of the brand’s intellectual property, including the moderate collection Betseyville. Madden now has licensing deals with the designer’s company, Betsey Johnson LLC, for it to produce the clothing and operate her boutiques and get royalties from Johnson’s firm and its other licensees. According to sources, Madden pumped in $3 mm for five years to help with her firm’s operating needs. Steve Madden Ltd. gets a 10% equity in that operating company in exchange. Beyond the initial investment, Madden said the strategy is to ramp up marketing and fortify the daytime dress and shoe businesses.  <wwd.com/business-news>

Hedgeye Retail’s Take:  Not a bad move as Madden looks to diversify into new product categories and away from the core brand.  With that said, given the amount of debt that Johnson was saddled with, we wonder how much cost cutting and streamlining will be needed to get the business moving in the right direction.

 

Wal-Mart Plans to End Profit Sharing Contributions - Wal-Mart Stores Inc., the largest U.S. private employer, plans to end profit-sharing contributions in February, replacing them by matching some of the dollars employees put in their 401(k) retirement plans to pare expenses. The retailer will match contributions up to 6% of eligible employees’ pay, according to a memo obtained by Bloomberg News. Previously, Wal-Mart automatically put up to 4 percent of pay into the profit-sharing plan. The switch by Wal-Mart, which has about 1.4 million U.S. employees, will only benefit those who are in the plans, so staff will need to join to profit from the move. <bloomberg.com>

Hedgeye Retail’s Take:  While cost savings is the leading factor here, WMT may actually be late to the party of those shifting retirement plans towards 401k from more traditional profit sharing plans.  The focus here however, still remains on driving the topline rather than cutting costs.

 

New Reef Brand President Has Tough Road Ahead - New Reef President Jeff Moore, who began work at the brand last month, could have his work cut out for him. While the brand maintains a leadership position in the flip-flop category, competition is increasing and cutting into Reef’s business. Brands such as Sanuk and Olukai have been pressuring Reef's business. Moore said he hoped to firm up the operations by shifting the at-once business to a futures strategy. Moore said he hoped to entice surf shops with special product that will be available only through pre-orders. <wwd.com/footwear-news>

Hedgeye Retail’s Take:  What was once thought to be another “lifestyle” growth brand for VFC, now seems to be flip-flop company under pressure.  Product diversification probably still makes sense here as the brand looks to de-seasonalize its core biz.

  

American Apparel Appeases Lender With Key Management Hiring - Beleaguered US chain American Apparel has hired Blockbuster executive Tom Casey as acting president, in line with a pledge to lender Lion Capital to secure key management talent. <drapersonline.com>

Hedgeye Retail’s Take:  We’re still scratching our heads on this hire, who comes with substantial Blockbuster restructuring/bankruptcy experience.  We’re pretty sure Lion Capital is hoping Mr’ Casey learned what NOT to do in order to survive.

 

Maidenform and Time Three Clothier Sue Over Shapewear Design - Innerwear giant Maidenform Brands Inc. and Times Three Clothier LLC are suing each other over the design of shapewear that launched last year. The litigation involves Maidenform’s multimillion-dollar Fat Free Dressing by Flexees line and Yummie Tummie, a contemporary shapewear line from Times Three Clothier that has estimated wholesale sales ranging from more than $8 mm to double digits. <wwd.com/markets-news>

Hedgeye Retail’s Take:  Nothing like litigation to settle a dispute over laziness.   If consumers were just a bit healthier, this whole debate wouldn’t even matter. Instead, we’ll continue to monitor shapewear as yet another “lazy” trend.

 

CSN Stores Finds A Way to Make Money From Consumers Who Don't Buy Online -  CSN Stores launched a paid ad platform that enables bricks-and-mortar furniture retailers to buy ads on CSN sites that also sell furniture.  More than a year later, the company says the program delivers to consumers visiting the CSN site the most relevant, localized information. CSN says the ads do not cannibalize its web sales, even though one study of the program suggests the program boosts the number of visitors to competing retailers’ sites. The Get It Near Me ad platform launched in August 2009 but the company has been actively pursuing sales only for the last five months. The program is open only to retailers with a bricks-and-mortar presence, but retailers that have an e-retailing arm in addition to a retail storefront also are allowed.  <internetretailer.com>

Hedgeye Retail’s Take: Give credit where it’s due, CSN started up in 2002 and has grown into a Top 3 online U.S. retailer of home and office goods. While the ad model may have worked well with so many retailers lacking an e-commerce presence initially, as that mix shifts, it’s likely that so too will CSN’s model. It may be decidedly cheaper for retailers to partner with CSN given its web prowess – particularly if the company decides to pull the plug and key traffic feed for bricks-and-mortar retailers.

 

Specialty Retail Adds Jobs Into Holiday Season While Department Stores Cut - Specialty retailers added jobs in September while department stores eliminated positions, the Labor Department said Friday. Specialty retailers added 2,500 jobs to employ 1.39 mm in September. Department stores eliminated 2,100 positions to employ 1.49 mm. In the broader economy employers cut 95,000 jobs in September, driven in part by the elimination of a significant number of temporary census jobs. <wwd.com/business-news>

Hedgeye Retail’s Take: With shoppers buying ‘closer to need’ we expect hiring to accelerate from both specialty and department store retailers following the likes of Kohl’s announcement to hire over 20% more temporary workers this year after multi-year reductions at the employee level.

 

Import Cargo Volume Expected to Slow Again in October - Import cargo volume at the nation’s major retail container ports is expected to be up 11% in October over the same month last year and should continue to see year-over-year growth even as seasonal levels wind down through the remainder of 2010. While October has long been the busiest month of the year as retailers rush to fill shelves with merchandise for the holiday season, the peak shifted to August this year. The change came both because of a backlog in cargo from earlier in the year after ocean carriers were slow to replace vessels taken out of service during the recession, and because retailers brought merchandise into the country early to avoid the risk of delays this fall. September was estimated at a 20% increase while October slowed to 11% .  <sportsonesource.com>

Hedgeye Retail’s Take: Slowing volume has been largely expected as demand for 2H inventory came earlier in light of anticipated capacity constraints as well as a modest shift to air freight.

 

Jewelry Industry Pressured by Gold Prices - The jewelry industry is scrambling to adapt as the price of gold hits new peaks. With economic uncertainty high and interest rates at historic lows, investors have sought refuge in the precious metal, which has risen almost 23% this year. The surge in gold has forced jewelers to turn to lower-cost metals such as brass and copper, adjust with designs that require less of the precious metal and expand the use of cheaper mixed materials such as a combination of gold and sterling silver called “gilver.” Lowering the price of fine jewelry by incorporating silver is no longer full-proof as silver hit a high last week, of $23.52 and has increased 27% this year. <wwd.com/markets-news>

Hedgeye Retail’s Take: Raw material costs are up across industries, but turning towards intentionally degrading the quality of goods as is the case with ‘gilver’ is rarely successful catalyst to drive demand.

 

 


WEEKLY FINANCIALS RISK MONITOR - BROADLY POSITIVE ON A SHORT AND INTERMEDIATE TERM BASIS

Financial Risk Monitor Summary (Across 3 Durations):

  • Short-term (WoW): Positive / 7 of 10 improved / 1 of 10 unchanged / 2 of 10 worsened
  • Intermediate-term (MoM): Positive / 8 of 10 improved / 1 of 10 worsened / 1 of 10 unchanged
  • Long-term (150 DMA): Negative / 5 of 10 worsened / 2 of 10 improved / 2 of 10 unchanged / 1 of 10 n/a

WEEKLY FINANCIALS RISK MONITOR - BROADLY POSITIVE ON A SHORT AND INTERMEDIATE TERM BASIS - summary

 

1. US Financials CDS Monitor – Swaps were nearly all positive last week, as they were the previous week.  Swaps tightened for 27 of the 29 reference entities and widened for only two.

 

Tightened the most vs last week: ACE, ALL, XL

Tightened the least/widened vs last week: BAC, AXP, PRU

Tightened the most vs last month: SLM, MTG, AIG

Tightened the least/widened vs last month: AXP, PRU, PGR

 

WEEKLY FINANCIALS RISK MONITOR - BROADLY POSITIVE ON A SHORT AND INTERMEDIATE TERM BASIS - cds us fig

 

2. European Financials CDS Monitor – In Europe, the pattern was similar. Swaps tightened for 35 of the 39 reference entities tightened and widened for the only 4.  The worst-performing banks are located in Ireland and Greece, showing that sovereign debt remains a concern. 

 

Tightened the most vs last week: Intesa Saopaolo, UBS, HBOS

Widened the most vs last week: Alpha Bank, National Bank of Greece, Bank of Ireland

Widened the most vs last month: Alpha Bank, National Bank of Greece, Bank of Ireland Tightened the most vs last month: RBS, Svenska Handelsbanken, UBS

 

WEEKLY FINANCIALS RISK MONITOR - BROADLY POSITIVE ON A SHORT AND INTERMEDIATE TERM BASIS - euro cds

 

3. Sovereign CDS Monitor  – Sovereign CDS fell 8 bps on average last week, led by Ireland, Portugal, and Greece once again. 

 

WEEKLY FINANCIALS RISK MONITOR - BROADLY POSITIVE ON A SHORT AND INTERMEDIATE TERM BASIS - sov cds

 

4. High Yield (YTM) Monitor – High Yield rates fell last week, closing at 7.98 on Friday, the lowest level since June of 2007.  

 

WEEKLY FINANCIALS RISK MONITOR - BROADLY POSITIVE ON A SHORT AND INTERMEDIATE TERM BASIS - high yielde

 

5. Leveraged Loan Index Monitor – The leveraged loan index rose 11.4 points last week, closing at a new YTD high. 

 

WEEKLY FINANCIALS RISK MONITOR - BROADLY POSITIVE ON A SHORT AND INTERMEDIATE TERM BASIS - lev loan

 

6. TED Spread Monitor – Last week the TED spread climbed, closing at 17.5 bps.

 

WEEKLY FINANCIALS RISK MONITOR - BROADLY POSITIVE ON A SHORT AND INTERMEDIATE TERM BASIS - ted spread

 

7. Journal of Commerce Commodity Price Index – Last week, the index fell 0.66 points, closing at 15.4 on Friday.

 

WEEKLY FINANCIALS RISK MONITOR - BROADLY POSITIVE ON A SHORT AND INTERMEDIATE TERM BASIS - joc

 

8. Greek Bond Yields Monitor – We chart the 10-year yield on Greek bonds.  Last week yields fell 38 bps, ending the week at 977 bps versus 1015 bps the prior week. 

 

WEEKLY FINANCIALS RISK MONITOR - BROADLY POSITIVE ON A SHORT AND INTERMEDIATE TERM BASIS - greek bond

 

9. Markit MCDX Index Monitor – The Markit MCDX is a measure of municipal credit default swaps.  We believe this index is a useful indicator of pressure in state and local governments.  Markit publishes index values daily on four 5-year tenor baskets including 50 reference entities each. Each basket includes a diversified pool of revenue and GO bonds from a broad array of states. Our index is the average of their four indices.  Spreads fell last week, closing at 199 versus 217 the prior week.   

 

WEEKLY FINANCIALS RISK MONITOR - BROADLY POSITIVE ON A SHORT AND INTERMEDIATE TERM BASIS - mcdx

 

10. Baltic Dry Index – The Baltic Dry Index measures international shipping rates of dry bulk cargo, mostly commodities used for industrial production.  Higher demand for such goods, as manifested in higher shipping rates, indicates economic expansion.  Last week the index rose, closing at 270 versus 245 the prior week.  

 

WEEKLY FINANCIALS RISK MONITOR - BROADLY POSITIVE ON A SHORT AND INTERMEDIATE TERM BASIS - baltic

 

Joshua Steiner, CFA

 

Allison Kaptur


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.

THE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP - October 11, 2010

As we look at today’s set up for the S&P 500, the range is 18 points or -1.21% downside to 1151 and 0.33% upside to 1169. Equity futures are trading above fair value in tandem with gains seen overnight across Asia and Europe although trading thus far has been quiet. Crude oil has risen on a weakening dollar as expectations of further QE gather pace in the wake of Friday's disappointing jobs report

  • Barron’s - Brinker International (EAT) may climb to $0.42 per sharein next year on new kitchens, menus
  • Barron’s - CIT Group (CIT) may rise >15% during next year and may be a target for a “capital-starved” bank.
  • Cypress Bioscience (CYPB) agreed to sell its diagnostic business to Exagen Diagnostics
  • J.C. Penney (JCP): Vornado Realty Trust (VNO) acquired ~9.9% JCP stock
  • Barron’s - Regal Cinemas (RGC) and Cinemark (CNK) are “cheap” on a free- cash flow basis, Barron’s said.
  • Barron’s - SuccessFactors (SFSF) may fall on stronger competition, growth.
  • Targa Resources Partners (NGLS) boosted Q dividend to 53.75c a unit from 52.75c, matches forecast

 PERFORMANCE

  • One day: Dow 0.53%, S&P 0.61%, Nasdaq +0.77%, Russell 2000 1.4%
  • Year-to-date: Dow +5.52%, S&P +4.46%, Nasdaq +5.85%, Russell +10.94%

 EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: +1467 (+1707)
  • VOLUME: NYSE - 943.44 (+3.63%)  
  • SECTOR PERFORMANCE: Every sector rose on Friday - Reflation, Reflation and Reflation.
  •  MARKET LEADING/LAGGING STOCKS YESTERDAY: CF Industries +11.42%, Gannett +8.02% and H&R Block +7.47%/Tyson -7.74%, Adobe -5.93% and Owens Ill -4.08%.
  • VIX: 20.71 -3.94% - YTD PERFORMANCE: (-4.47%)
  • SPX PUT/CALL RATIO: 1.69 from 1.38, +22.06%

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: - 17.45
  • 3-MONTH T-BILL YIELD: 0.12% -.01%
  • YIELD CURVE: 2.06 from 2.05

COMMODITY/GROWTH EXPECTATION:

  • CRB: 295.11 +2.72% - up for the last 7 weeks
  • Oil: 82.66 +1.21% up 3 weeks in a row
  • COPPER: 377.45 +2.58% - up 7 of the last 8 weeks
  • GOLD: 1,343.85 +0.69% up 5 of last 6 weeks

CURRENCIES:

  • EURO: 1.3939 +0.38% up 5 of the last 6 weeks
  • DOLLAR: 77.325 -0.08 down 5 of the last 6 weeks

OVERSEAS MARKETS:

 

Europe

  • European markets edged higher, though activity is subdued with little major economic or corporate releases and US bond markets are closed today for a public holiday.
  • Major European indices gave up modest opening advances, drifting back to trade little changed before edging higher and currently trade just below the session’s earlier highs.
  • The majority of European sectors trade higher led by the technology and auto sectors. US futures trade higher
  • France Aug Industrial Production +0.0% m/m vs consensus +0.3% and prior revised +0.8%
  • France Aug Manufacturing Output +0.0% m/m vs prior +1.2%

Asian

  • Nikkei (closed); Shanghai Composite +2.50%
  • The Hang Seng saw a two-year high as expectations of further Fed easing boosted resource stocks, while Sydney and Shanghai saw five-month highs.
  • Asian markets rose today after Friday's US jobs report raised expectations that the Fed will announce new measures aimed at propping up the weak economy and the dollar continued its deterioration.
  • The dollar hit a new 15-year low against the yen after last week hitting an all-time low against the Australian dollar since the Australian dollar was allowed to float in 1983 Japanese markets are closed today
  • Chinese officials over the weekend rejected calls for a significantly stronger renminbi. China’s unit hit a new post-2005 revaluation high vs the dollar of Rmb 6.6645
  • China raises deposit reserve ratio for six big banks by 50 bps 
Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends

 

THE DAILY OUTLOOK - S P

 

THE DAILY OUTLOOK - VIX

 

THE DAILY OUTLOOK - DOLLAR

 

THE DAILY OUTLOOK - OIL

 

THE DAILY OUTLOOK - GOLD

 

THE DAILY OUTLOOK - COPPER



THE M3: GOLDEN WEEK VISITATION

The Macau Metro Monitor, October 11th 2010

 

MORE VISITORS DURING THE NATIONAL DAY GOLDEN WEEK macaubusiness.com, Intelligence Macau

Golden Week (October 1-7) visitors surpassed 680,000, an increase of nearly 13% YoY. More than 470,000 were from Mainland China, a 12.38% YoY growth.  The average occupancy rate of three-to-five-star hotels during the National Day Golden Week holiday reached 90%, a 2.7% point increase YoY.  The ADR of three-to-five-star hotels was MOP1,422 (US$178), up 16% YoY.

 

IM is concerned about the the overflowing traffic at the Gonbei immigration checkpoint.  The capacity limit at the facility is only 300,000 visitors per day.  The very long wait lines may deter visitors to Macau for next year's Golden Week.


Defend Yourself

“Defense is superior to opulence.”

-Adam Smith

 

Thankfully, I didn’t waste much of my time this weekend listening to professional politicians at the IMF meetings in Washington make their proactively predictable protectionist comments about global currencies. As the aforementioned Scottish moral philosopher aptly put it, “all money is a matter of belief.”

 

Neither Adam Smith’s ideas about free market capitalism, nor his citations from “The Wealth of Nations” get much air time in the manic media these days. US stock market cheerleaders are much more focused on “New Keynesian” economic theories of Big Government Intervention that  are allegedly going to help policy makers save themselves from adhering to the laws of gravity.

 

Rather than engage in a philosophical or ethical debate about ideas coming out of the Scottish Enlightenment this morning, I’m going to give you some advice in modern day plain English – Defend Yourself. That’s right and that’s it – defend yourself because, unless you have a legitimate Global Risk Manager managing your money, no one else will.

 

Notwithstanding the obvious protectionist commentary coming out of the world’s top 3 economies this morning (USA, China, and Japan), here are a few other representative central banker quotes that came out of the IMF meetings:

  1. Brazil: “Brazil won’t pay the price for several countries’ imbalances. Our position is: Brazil will protect its economy regardless.”
  2. Philippines: “In the face of possible further weakness in the US Dollar, the central bank continues to assess investment diversification options.”

At the end of the day, the world is still too long of the US Dollar and the broken promises that back it. This isn’t new (we’ve been short the US Dollar since June 7th). It’s simply becoming consensus. And, unlike stock market consensus, global political consensus is much more difficult to reverse.

 

The “consensus” 2-2.5 month direction of the US stock market has been often reversed in 2010. Students of the Real-Time Market Enlightenment get this. As a result, they will likely continue to profit from the Mathematical Enlightenment called mean-reversion.

 

Since we made our call for May Showers on April 16th, I haven’t seen such obvious signals to suggest you defend yourself from a US stock market exposure perspective. Never mind what the dude at Citi thinks about our levels, Newton and Einstein would most likely love this call as our Hedgeyes are intensely focused on measuring both time and space.

 

Time (duration) and price (space) aren’t very useful for economic theoreticians who have never traded a market in their life. Today’s selling opportunity is really amplified by the Academic Dogma that is driving US political consensus that QE2 is going to end well. As your local professional politician Burns the Buck, global politicians are becoming increasingly protectionist about what it means for their constituencies.

 

Admittedly, we were a little early with the April Flowers/May Showers macro call by about a week (the SP500 topped for 2010 YTD at 1217 on April 23rd). But early is as early does – seeing something coming before it actually occurs and having the patience to wait for your entry point (or in this case, selling point) is easily the most challenging aspect of my risk management day.

 

In the spirit of keeping the accountability pants on, as a reminder here are the market factors I’ve been looking for since the morning of September 29th when I wrote a note titled “A Heavier Crash”:

  1. We need to see the SP500 get squeezed one more time in the next few weeks to a price north of 1164.
  2. We need to see volatility (VIX) get oversold towards 20.
  3. We need to continue to see the world’s said “reserve currency” lose its credibility.

And no matter where we go this morning, here we are. Check, check, and check on the levels. Fellow Risk Managers, ‘tis time to defend yourself.

 

I started buying protection by investing in volatility (VXX) on Friday. I get that it’s not a perfect instrument when considered alongside the volatility index (VIX), so we model the risk/reward and probability in the VXX from the bottom-up on its own historical price, volume, and volatility merits.

 

I have not yet shorted the SP500 (SPY) as my risk management model was flashing amber lights on Friday to wait and watch for the 1169 line in terms of the US stock market being immediate term overbought.

 

Yes, Dear Theoretical Dogmatists, Hedgeye reserves the unalienable right to change our game-plan as the game changes. Defending ourselves against your Ivory Tower economics is our advice as we drift ominously higher toward 3 more Fridays in October.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Defend Yourself - EL heute


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