Conclusion: Looking at the macro data, it makes little sense to us that consensus 3Q GDP growth is at 1.9% (per Bloomberg).  Retail Sales, Industrial Production, and Housing indicate to us that a sequential slowdown is more likely what occurred.


We cannot make sense of consensus.  Can you?


As it stands currently, the consensus is showing 2Q GDP growth of 1.9% according to Bloomberg.  Hedgeye is expecting growth of 1.3% and that number could be revised downward, with the potential for an outright contraction in the fourth quarter.  The BEA is expected to release the advance estimate of 3Q GDP on Friday, October 29th.  There is a significant chance that this GDP report is close to consensus expectations as it is the last major piece of economic data before the midterm elections.  The economic data reported of late suggests that.  However, reporting risk remains for a downside surprise to those expectations and here is why. 


As you can see clearly from the charts below:

  1. 3Q10 retail sales slowed sequentially
  2. For the third-quarter, seasonally-adjusted industrial production reportedly grew at annualized pace of 4.8%, down from a 7.0% pace in the second-quarter.
  3. During the third-quarter, seasonally-adjusted housing starts contracted at an annualized pace of 8.16%, versus a 9.38% annualized contraction in the second-quarter.

 USA GDP UPDATE - STAGFLATION? - us retail sales yy chg


 USA GDP UPDATE - STAGFLATION? - industrial production


 USA GDP UPDATE - STAGFLATION? - housing starts qann


In addition to all of this, the August trade deficit was definitely bad enough to reduce the upcoming estimate by nearly 1%.  With a slowdown fully established, the need for inventory building also slows.  From 1Q10 to 2Q10 the contribution to percentage change in real GDP from “change in private inventories” slowed from 2.64% to 0.82%; the 0.82% represented 47% of total GDP growth in the second quarter. 


As a point of reference, when consumer demand contracted in the fourth quarter of 2008, the contribution to percentage change in real GDP from “change in private inventories” dived as low as -2.31%.  Real GDP contracted 6.8% P/P in 4Q08.


Before we get the politicized GDP report a week from Friday, we will get two more data points on housing, both of which we think will be BOMBS.  On Monday, we get the September existing home sales followed by new home sales on Wednesday.  Hedgeye’s financials sector head, Josh Steiner, believes that next Tuesday’s Case Shiller print will be negative for home prices.


Lastly, on 9/27 we noted that new orders for durable goods were (as of July and August's data), seeing a sequential slowdown versus 2Q of 0.3%, while still growing ear-over-year.  While the durable goods number missed overall expectations, when transportation and aircraft were stripped away it beat.


So how could all these institutions (shown in the chart below) have a 3Q GDP growth number above 2%?  If you can offer explanation, please let me know. 


Howard Penney

Managing Director


 USA GDP UPDATE - STAGFLATION? - gdp growth estimates

The defeat of Multiculturalism in Germany?

The debate on Muslims in Germany reached a critical point over the weekend with Chancellor Merkel saying that multiculturalism (or Multikulti in German) has “totally failed” in Germany.  Her remarks follow a heightened exchange on the topic, especially from Germany’s most recognized politicians, after the release of Thilo Sarrazin’s controversial book titled ‘Germany Does Away With Itself’ in late August 2010.


Sarrazin, a former member of the Executive Board of the Deutsche Bundesbank (before being asked to step down last month by Bundesbank President Max Weber) claimed in his book that Germany is facing a collapse due to the growing number of under-educated Muslims that resist integrating in German society, which are contributing to a brain- and welfare drain on the country.  He remarked that Berlin’s Arab and Turkish immigrants had no useful function “except for the trading of fruit and vegetables,” a comment that captured global headlines, cost him his job, and surely severed any chance for a future political career. 


The debate over the integration of Muslims (and generally immigrants) in German society has a long tail. If we consider the period following World War II, Germany had a shortage of labor during the “economic miracle” (Wirtschaftswunder) in the 1950s and 1960s that led to the active recruitment of workers, particularly from Italy, Greece, Turkey, Morocco, Portugal, Tunisia, and Yugoslavia to fuel the booming economy.  After 1961, Turks became the largest group of workers (Gastarbeiter), and despite original intentions from the government for these workers to only be ‘temporary’, many Turks stayed and built or brought over their families to Germany.


Since the settlement of the original Gastarbeiter, who were never recognized as citizens, Germany has wrestled with the status of its immigrant population, particularly those from Turkey and Arabic countries.  For context, today there are an estimated 3.8 -4.3 million Muslims in Germany, of which 2.5 million people of Turkish descent, the largest ethnic minority, of a total population of 82 million.


Over the last decades Germany has actively supported “multiculturalism”, a social, political and economic policy of tolerance, cooperation, and support of Germany’s “non-ethnic” population to knead (integrate) them into the German fabric while respecting their right to preserve cultural differences.  However, critics suggest that multiculturalism never dealt squarely with what some have dubbed the country’s “Islamophobia”, and suggest that multiculturalism was destine to fail given the intolerance of a dominant German culture.


Further, skeptics like Sarrazin say that multiculturalism has failed because Turks refuse to integrate. As supporting evidence, this camp cites that Turks commit more crime than “ethnic” Germans, refuse to learn proper German, and generally underperform in school.


Therefore, it is under this cultural legacy that Chancellor Merkel’s call of multiculturalism as a total failure is so landmark. Merkel’s remark negates years of a perceived progressive policy to integrate its Muslim minority, and sends a defeated tone to its neighboring countries that have also struggled to integrate immigrants from Arabic countries.


However, recent remarks from German President Christian Wullf, who is currently in Ankara, suggest he’s trying to quell the heated integration debate, and lessen Merkel’s absolute statement.  Yesterday, with Turkish President Abdullah Gül, Wullf said, “I consider it wrong to claim that a whole group cannot and does not want to integrate… I am against any blanket judgment.”


We believe that Wullf’s tact is prudent, especially given that Merkel’s blanket statement provides no road-map for integration policy ahead.  


What’s clear is that at a time when austerity measures (in Germany and throughout Europe) crimp economic growth over the longer term, with consumers pinched through higher taxes, lower wages, and less job opportunities, it is the “immigrants” that are often first targeted as a drain on government coffers. Returning to Germany, it’s worth note that surveys and studies by the Berlin Institute have found over repeated years that of all immigrant groups in Germany, those from Turkey are the least integrated, worst educated, worst paid, and have one of the highest levels of unemployment. 


Given these results, and the fact that Germany has a declining and aging population, Germany will need to address its integration policy for it will likely be its immigrants, who tend to have more children, that will be needed to fuel its population and economic growth. If Germany cannot solve its integration issue, especially to education its future labor force, the country will set itself up for an increased drain on its welfare state. From a mindshare perspective, Germany has a large share of the pie in framing the integration debate.  We’d expect the ‘heat’ surrounding recent statements to abate, however this recent controversy may be exactly what the country needs to more constructively address its integration shortcomings.


Matthew Hedrick

R3: Adi, SKX, KCP, VLCM, and SHLD


October 20, 2010


Adi enters the competitive arena for hoops with new kicks for Derrick Rose and Dwight Howard.  We continue to believe the biggest beneficiaries of new product launches are the retailers, which will not only benefit from new SKU’s but also stepped up marketing from the brands. 




- In the never ending quest to effectively market and ultimately sell plus sized apparel, Forever 21 is rebranding its efforts in this category.  The company has changed its plus size sub-brand from Faith 21 to Forever 21+.  The merchandise remains the same.


- Toys R Us continues its expansion efforts in a-typical sites.  Not long after announcing a major holiday effort to open 600 pop-up shops, the company is also opening in outlet centers.  The Shops of Grand River in Leeds, Alabama will be the site of the company’s newest location.


- According to a study by RightNow, consumers will pay more for a superior customer experience.  In fact, 85% of those surveyed say they would pay more over standard prices for such an experience.  More than half would actually pay 10% or greater.  55% of consumers have also become customers of a particular brand because of that brand’s customer service reputation.  With costs on the rise, we wonder if adding service back into the stores could be the answer to combating the increases.





Adidas Launches Signature Shoes for Rose and Howard - Adidas launched signature basketball shoes for NBA stars Derrick Rose and Dwight Howard. Rose, of the Chicago Bulls, will wear adidas adiZero Rose while Howard, of the Orlando Magic, will wear adidas Beast. <>

Hedgeye Retail’s Take:  With Nike pushing LeBron and Kobe, UA launching Brandon Jennings, Reebok betting on John Wall, it was only a matter of time before Adi got more visible with its basketball efforts.  Good for retailers, especially FL and FINL.


Adidas Expands its Partnership with Sennheiser - Audio specialist Sennheiser and sporting goods manufacturer adidas are extending their joint headphone line with the addition of the CX 680i Sports, MX 680i Sports, OMX 680i Sports and PMX 680i Sports models, designed for use with the iPhone. <>

Hedgeye Retail’s Take:  As technology and sport continue to blend, it’s no surprise that efforts continue to move forward to capitalize on the iPhone’s popularity.  Both Nike and Adi have long partnered with CE manufacturers to co-brand products including headphones and mp3 players.


Shape-ups Campaign to Star Karl Malone - Skechers USA, Inc. announced that the company is launching a series of Shape-ups fitness footwear television spots starring NBA basketball legend Karl Malone along with guest star Kareem Abdul-Jabbar. The spots follow Shape-up commercials featuring NFL legend Joe Montana. <>

Hedgeye Retail’s Take:  We wonder if SKX is having trouble finding athletes that are actually still playing or if this marks a clear targeting effort towards 40+ year old men?  Upon further review, it’s likely the latter.  Either way, we still believe the men’s formula will be far tougher to crack given that competition for the male wallet is entrenched with the traditional sporting goods brands rooted in authenticity.


KCP Ends Women's Sportswear Collection Licensing Agreement Early - Kenneth Cole Productions has ended its five-year licensing agreement with Bernard Chaus Inc. for the Kenneth Cole New York women’s sportswear collection, effective June 1, and will take the line in-house.The Chaus agreement was scheduled to expire in June 2012. KCP claims the move was strategic, bringing women’s sportswear in-house to leverage existing capabilities and build their women’s business. Kenneth Cole has been designing, developing and sourcing women’s sportswear in-house for the product that is sold in its own stores, outlets and online. The Kenneth Cole New York collection, developed by Chaus, was primarily geared to department and specialty stores such as Nordstrom, Lord & Taylor, Bloomingdale’s, Dillard’s and Belk, with some carried in Kenneth Cole stores. Kenneth Cole will start making all the women’s merchandise, beginning with the fall 2011 season. Chaus will manufacture and market the line through spring 2011. Going forward, the entire Kenneth Cole New York collection will be under the design supervision of Ingo Wilts, senior vice president, creative director of Kenneth Cole. <>

Hedgeye Retail’s Take:    This likely has as much to do with Chaus’ struggles as it does with going on offense to “own” the women’s sportswear collection.  Either way, this will not be an easy task.


Volcom to Distribute in Spain - Volcom, Inc. intends to directly distribute the company's products in Spain having acquired strategic assets from its current distributor in the region. Terms of the transaction were not disclosed. <>

Hedgeye Retail’s Take:  Looks like VLCM is on track for a traditional global expansion effort, one which eventually buys back distributorships after the seeds have been planted in a particular region.


Another Revamp For - For a second time this year, the e-commerce site gets a new look, this time with a fresh logo and increased emphasis on user-generated content. The retailer also has launched a service that enables shoppers to see ratings and reviews and create a public profile. <>

Hedgeye Retail’s Take:  Facebook married with Sears?  Even that won’t help stem the market share losses. 


Modell's Launches Winter Shops - Modell's Sporting Goods launched their first ever Winter Shop to be featured in each of the chain's 146 stores this holiday season. <>

Hedgeye Retail’s Take: Smart move to finally put all the fleece, hats, gloves, and outerwear all in one place.  In the past, product was dispersed within each brand pad, making shopping for seasonal gear more difficult and time consuming.


FiveFingers Named Site of the Day - FWA (Favorite Website Awards) awarded Vibram FiveFingers' YouAreTheTechnology microsite with the coveted Site of the Day award. The site illustrates the "naked truth" about running, by underscoring the power and 'natural technology' of the human body. <>

Hedgeye Retail’s Take: The barefoot running shoe is gaining traction and a killer website certainly helps. This website explores the naked truth, literally…


NBA Bans Shoe on Claims of Enhanced Performance - For the first time in its 64-year history, the National Basketball Association (NBA) has banned a new line of shoes based on the league's rule against an "unfair competitive advantage" that increases a player’s vertical leap. The league’s ban on Athletic Propulsion Labs' Concept 1 confirms the company’s claims that the shoe, with its Load ‘N Launch™ Technology, performs as advertised. No professional player will be allowed to wear the product in games for the upcoming 2010-2011 NBA season. Prior to the ban, the Concept 1 shoe had already attracted the interest of NBA players, including a raft of rookies, some of whom have tested them in non-NBA settings. Retailing for $300, the shoes continue to be sold primarily through APL’s website, and the company is exploring a potential expansion into select athletic footwear and sporting goods retailers. <>

Hedgeye Retail’s Take: At $300 this specialty shoe isn’t a mass market product, but with its shoes now banned by the NBA, it’s time for Athletic Propulsion Labs to find new applications – we may have another player in the toning category before long here and one with credible technology.


Outdoor Sales Slow to Recover, Slight Uptick - Rebounding slightly from a stagnant August, outdoor product retail sales growth increased at a snail’s pace in September, tied to still-warm weather patterns, lingering weakness in the economy and continued lack of consumer confidence.  <>

Hedgeye Retail’s Take: Despite an unseasonably warm September and tough comps in October, a cold snap lead to a 44% increase in outdoor sales in the first week of October. With Outdoor Outerwear up +35% again last week, Q4 is off to a strong start – something we’re likely to receive confirmation of on VFC’s Q3 call tomorrow.


Eurozone Retail Headwinds - Transport strikes in Paris and London this month have not only brought misery to thousands of commuters, but reflect widespread public anxiety about the impact of government measures to stem ballooning budget deficits. Economists predict the austerity measures being implemented across the Eurozone will dampen household morale throughout the second half, causing consumer spending to slow — although the majority think a double-dip recession is unlikely. The prospect of widespread public sector spending cuts has already begun to send shivers through the U.K. retail sector, while French households are struggling to emerge from the doldrums despite brightening job prospects. Repeated strikes in France risk further harm to an already tepid retail outlook. As consumers head into the crucial holiday spending season, growth in Germany, the currency area’s biggest economy, is far outstripping that of debt-laden peripheral countries like Spain, Ireland, Italy, Portugal and Greece. <>

Hedgeye Retail’s Take: At best, these strikes are a multi-day disruption, but could have lasting effects on the Eurozone as consumer confidence deteriorates. Our expectation for a downturn in consumer spending domestically in the 2H does not impact the U.S. alone.


Shoppers Take a Nonlinear Path to Purchase - A lingering recession, coupled with consumers’ rapid adoption of digital tools, has inexorably altered shopping behavior in categories like groceries, home electronics, apparel and quick-service restaurants. Consumers engage with a variety of digital platforms as they research small and large purchases, when they’re in physical stores and during post-shop activities such as product reviews and referrals. Further, the path to purchase is increasingly nonlinear, according to the findings of a global retail study conducted by Microsoft Advertising and Carat. The study, conducted in March 2010, examined how the recession has changed shoppers’ purchasing habits and how different media touchpoints affect consumer shopping behavior, including the way people learn about, research and discuss their purchase decisions. This shift has altered the traditional purchase funnel whereby marketers move consumers from awareness to sales to include digital media. For example, consumers may first learn about a product based on a tweet from a friend or a post on a social network, then go online via computer or smartphone to research the product, search for the product and consult product reviews.  <>

Hedgeye Retail’s Take: As e-commerce sites evolve, consumers can now act on referral based leads, compare price and rifle shoot purchasing more than ever – a much improved process relative to the old shotgun approach. The shift of the ‘traditional purchase funnel’ has likely changed for good.



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TODAY’S S&P 500 SET-UP - October 20, 2010

As we look at today’s set up for the S&P 500, the range is 15 points or -0.93% downside to 1155 and 0.35% upside to 1170. Equity futures are trading above fair value and close to session peaks as markets recover some of their poise in the wake of yesterday's decline.


Earnings remain a key focus this morning, while the Beige Book will provide the main economic focus.

  • Cree (CREE) 2Q sales forecast missed est.
  • Intuitive Surgical (ISRG) 3Q rev. missed est.
  • Juniper Networks (JNPR) 4Q sales, adj. EPS may beat est. 
  • Stryker (SYK) 2010 EPS forecast exceeds est., raises FY EPS bottom end forecast
  • Western Digital (WDC) 1Q adj. EPS beat est.
  • Yahoo! (YHOO) forecast 4Q sales below est.


  • One day: Dow (1.48%), S&P (1.59%), Nasdaq (1.76%), Russell 2000 (2.25%)
  • Month/Quarter-to-date: Dow +1.77%, S&P +2.16%, Nasdaq +2.88%, Russell +2.66%
  • Year-to-date: Dow +5.28%, S&P +4.56%, Nasdaq +7.39%, Russell +10.99%
  • Sector Performance: Materials (2.56%), Energy (1.99%), , Healthcare (1.88%), Consumer Disc (1.81%), Tech (1.77%), Industrials (1.33%), Financials (1.39%), Consumer Spls (1.22%), Utilities 0.19%.


  • ADVANCE/DECLINE LINE: -1977 (-2961)
  • VOLUME: NYSE - 1271.64 (+27.65%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Massey Energy +4.98%, Capital One +4.11% and Parker Hannifin +3.67%/Supervalue -14.92%, Harley Davidson -6.74% and Urban Outfitters -6.12%.
  • VIX: 20.63 +8.41% - YTD PERFORMANCE: (-4.84%)
  • SPX PUT/CALL RATIO: 1.46 from 1.45 +0.86%


  • TED SPREAD: 15.66 -0.265 (-1.664%)
  • 3-MONTH T-BILL YIELD: 0.14% -0.01%  
  • YIELD CURVE: 2.13 from 2.14


  • CRB: 292.98 -1.93%
  • Oil: 79.49 -4.32% - BULLISH
  • COPPER: 375.75 -2.53% - OVERBOUGHT
  • GOLD: 1,341.00 -2.21% - BULLISH


  • EURO: 1.3812 -1.27% - BULLISH
  • DOLLAR: 77.752 +1.62%  - BEARISH



European markets:

  • FTSE 100: +0.33%; DAX +0.19%; CAC 40 +0.21%
  • Major indices have reversed opening losses to trade in the black helped by a recovery in financials and firmer metals prices which has helped drive mining shares higher.
  • BASF (BAS.GR) hiked its 2010 forecasts.
  • UK BoE minutes show MPC split on QE, Chancellor Osborne to give a statement on Spending Review.
  • German Govt forecasts growth of +3.4% in 2010 and +1.8% in 2011
  • Germany Sep PPI +3.9% y/y vs cons +3.8%

Asian markets:

  • Nikkei (1.65%); Hang Seng (0.87%); Shanghai Composite +0.07%
  • Regional markets closed lower, with metals and resources stocks leading declines on China’s interest-rate hike.
  • China reversed an initial 1.8% drop to close in positive territory, though property stocks showed substantial losses.
  • Blue chips traded lower in Japan, and China-related stocks fell significantly as all 33 sectors fell.
  • Gold miners fell in Australia on lower prices 
Howard Penney
Managing Director

THE DAILY OUTLOOK - outlook image













China's Team

“Leadership is getting someone to do what they don't want to do, to achieve what they want to achieve.”

-Tom Landry


Per our friends at Wikipedia, “the term America’s Team is a popular nickname in American sports that often refers to the Dallas Cowboys of the National Football League. The nickname originated with the team’s 1978 highlight film, where the narrator opens with the following introduction:”


“They appear on television so often that their faces are as familiar to the public as presidents and movie stars. They are the Dallas Cowboys, America's Team."


Tom Landry was the accountable leader and coach of America’s team. His teams won 2 Super Bowls, 5 NFC titles, and 13 Divisional titles and his 20 career playoff wins are still the most ever by an NFL coach. Ever, as we like to say at Hedgeye, is a very long time…


This year, America’s Team looks like it’s being coached by Ben Bernanke. The Dallas Cowboys have started the season at 1-4. Leadership is lacking and teams playing against them aren’t going to quantitatively ease what they want to achieve in spite of them.


Who is China’s Team? Who are their leaders playing for? Are they willing to do what they need to do to achieve what they want to achieve? Yesterday, China’s Team continued to do exactly what a politicized and feeble American leadership team has not, and will not, have the spine to do – respect the cost of capital and fight inflation.


China raised interest rates because they see what we see. It’s priced in copper, corn, and cows. Until yesterday, it was all staring every real-time risk manager in the face. Before yesterday’s -2% selloff, the CRB Commodities Index (a basket of 19 commodities) hit a fresh YTD high. The score is a stickler that way. It doesn’t lie; politicians do.


Yesterday morning, as Wall Street’s latest leadership lemming was talking about the “power of the franchise” at Bank of America while his stock was hitting a fresh 52-week low, I started laughing out loud in my office…


I wasn’t laughing because my Managing Director of Financials, Josh Steiner, has had me short BAC 9 times (profitably) since late 2009. I was laughing at Brian Moynihan like I would any coach or player who seriously has no idea how badly he is losing.


As the day progressed and the US stock market selloff picked up momentum, breaking a critical immediate term TRADE line of support (1170 on the SP500), it was hard to discern which factor was the driving force…

  1. Was it Apple?
  2. Was it Gold?
  3. Was it Bank of America?

Or was it fear that China’s Team was providing some leadership to this global economic system by doing something that US-centric stock market investors didn’t want them to do? China doesn’t want to hold the bag of inflation risk associated with Bernanke’s Quantitative Guessing.


Notwithstanding that the fear of raising interest rates is a narrative fallacy unique to CNBC watchers (Chinese stocks closed up overnight on news of their rate hike, fyi), this morning’s manic media in America will be right back at it beating the drum of losers.


In yesterday’s missive I wrote that America’s markets are turning into the sort of soft and qualitative excuse making zones where losers find comfort and coddling.


Read these two headlines this morning and you tell me – are we winners or losers?

  1. “Bank of America says it is not responsible for the poor performance of loans due to the bad economy” –CNBC
  2. “Dollar weakens on prospects of Fed officials to signal easing” –Bloomberg

Sadly, I think we have completely lost touch with what America’s Team should stand for. Whether it’s total abdication of responsibility from an Investment Banking Inc. CEO or a Blind Belief that Big Government Intervention is the only way out – it’s driving the winners in this country to trust China’s Team more than they trust their own.


Do you blame them? At the same time that Chinese, Brazilian, and Australian central bankers were proactively addressing inflation risk, the President of the Chicago Fed (Evans), who has never seen a commodity price go up that he’d call inflationary, was “reiterating his belief that the Fed should reassess how it measures inflation.” America, this is embarrassing. Flat out embarrassing.


After waiting and watching, we re-shorted America’s stock market team (SPY) last Wednesday, October 13th at 11:54AM EST. We shorted its conflicted and compromised currency (UUP) on Monday, June 7th at 3:38PM EST.


The losers in this country can call what my team does whatever they want – we call it being on the winning side of this leadership mess. We are Hedgeye Risk Management and we support this message.


My immediate term support and resistance lines for the SP500 are now 1155 and 1170, respectively. On weakness yesterday, we added another 3% to the long Germany (EWG) position in the Hedgeye Asset Allocation Model. Germany’s Team is winning too.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer

China's Team - china


The Macau Metro Monitor, October 20th 2010


In the first nine months of 2010, Macau’s total public revenue (not including autonomous agencies) rose by 37.3% to MOP55.82 billion (US$7 billion).  Direct taxes from gaming was up by 60.5% to MOP 46.56 billion.  A fiscal surplus of MOP31.91 billion was recorded in the first nine months of 2010, up by 56.7% as compared with the same period last year.

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.43%
  • SHORT SIGNALS 78.34%