Bear/Bull Battle: SP500 Levels, Refreshed

POSITION: no position in the SP500 here


These are the days that make you remember. Tops are processes, not points. Today is a better day than yesterday was to be covering shorts.


We are immediate term TRADE oversold anywhere under the 1179 line in the SP500. Immediate term TRADE resistance is now at a lower-high of 1210. This is the 6th day out of the last 7 that the SP500 has been in the red. This negative price momentum is new, and it should be respected from a risk management perspective. We’ve talked about the increasing probability of a compressed crash since mid-October.


The immediate term TRADE correlations between the US Dollar and everything else aren’t as strong as they were a month ago (that’s good). That said, the 3 fundamental factors that underpin our case for US JOBLESS STAGFLATION remain: 

  1.        Global growth is slowing
  2.        Global inflation is accelerating
  3.        Interconnected risk is compounding 

The VIX is busting out above both my TRADE and TREND lines of resistance today. The best strategy here is to trade (i.e. manage risk) proactively.



Keith R. McCullough
Chief Executive Officer


Bear/Bull Battle: SP500 Levels, Refreshed - 1


WMT-  headline doesn’t tell the whole story.  US comp was a little light, lower tax rate added about 2 cts which allowed them to print an inline #, inventories came in high, up 7% vs. sales up 2.6%.  mgt also indicated avg ticket declined- the first time we’ve seen this in a long time.  Recall that my negative thesis is one predicated on lack of pricing power and this is a clear example.  Street all bulled up on guidance which is a few cents ahead of estimates for 4Q, but mgt did little to explain the components of the guidance.  In other words, a low quality qtr with likely a low quality reason why their 4Q is slightly more bullish. 


HD- clean beat on a much better comp relative to LOW.   1.4% comps for HD, 0.2% for LOW.  Indicated nov is off to a good start and guiding 4Q to a LSD increase.  Again this one looks much better than LOW given they have greater control over their own destiny (at least for now).


TJX-  beat the pre-announced number by a penny but guidance is the issue here.  Guiding to down 1-3% comps and a range of eps just below the street for 4Q.  not terribly surprising given their conservatism, but they haven’t been massaging lower much over the past couple of years.  They are stepping share repo for next year.  All in likely a muted to negative response as things are finally slowing, albeit a slow pace.


ANF-  beat by 5 cts, but inventories are still up huge.  Up 64.5% vs. sales up 18%.  Gm’s down yet again, sg&a in control as sales did pick up sequentially. All in still concerned with inventories. 


JWN- probably the most inline of all of the reporting retailers today.  Only call out here is the conservative guidance of 2.60-2.65 with the Street at 2.65.  implies a lowering of 4Q despite a slight beat on 3Q.  Typical conservatism here.  Inventories still in decent shape, sales up 11.7% vs. inventories up 9.6%.


URBN- relief rally here on the inline print.  Street was very concerned about a miss and slowing trends.  It appears business picked up towards the end of the qtr after a very slow start. This gives mgt confidence in their outlook which assumes a similar sales trend to 3Q at up 4-5%.  In the absence of the miss, many people looking to get long one of the better growth names in the space.


Eric Levine


US Retail

Live From The DKS Call

Live from the Dick's 3Q Call 


-          New shared service format (self-help) outpaced footwear chain comp results by 500bps+

-          Texas stores have outperformed company average by a ‘wide margin’

-          See opportunity for further margin expansion in intermediate-term as they shift towards greater mix of footwear & apparel as well as private label and brand business



Key driver of footwear and apparel business is Under Armour and Nike - seeing great results from the Nike Fieldhouse concepts in stores. (Hedgeye: They're kind of obligated to say this).


Price Inflation:

  • Not seeing significant price inflation yet
  • Buying for Q3 and Q4 of next year and not seeing 'any pressure that makes us uncomfortable.'
  • (Hedgeye's Note: This is troubling. There will be a margin hit at DKS. They should plan for it).

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.

Europe’s Inflections

Hedgeye Portfolio: Short Euro via FXE; Long Germany (EWG)


German Bulls


The ZEW survey of German investor confidence came in well above expectations today, however despite the positive print capital markets across Europe are slumped over the fate of Ireland. As an important inflection, ZEW’s 6 month forward-looking economic sentiment gauge rose for the first time in the last seven months to 13.8 in November versus a forecast of -6 and an October reading of -7.2; the current situation gauge rolled higher to 81.5 versus 72.6 in October. See yesterday’s note titled “Ireland’s River Card” for our take on Ireland and the heightening risk trade in Europe.


We continue to like Germany (EWG) from a fundamental standpoint. Germany’s fiscal conservatism continues to be a bullish catalyst and a clear positive divergence over the bloated PIIGS (Sovereign Debt Dichotomy). Export orders, especially from Asia, continue to flash bullish, and a weakening EUR versus the USD should further propel export demand on the margin.


Europe’s Inflections - m1



UK’s Inflation Juice


As we’ve highlighted in our UK posts this year, the island nation continues to suffer from inflation above its target rate of 2%.  Inflation measured by the CPI rose 10bps to 3.2% in October year-over-year versus October. The chart below shows the divergence between average Eurozone CPI. As CPI continues to trend higher in the UK, and comments from the BoE suggest a rise could be seen well into 2011, the Bank will be challenged (should it be necessary) to issue further quantitative easing for fear of boosting inflation. And should economic growth slow in the UK over the coming quarters, which we’re suggesting due to the country’s austerity programs, the country could be in a real political quarrel on go-forward economic policy.


Europe’s Inflections - m2



Das Auto


Finally, as a measure of economic health, European new car registrations (across 25 states) declined 16% in October Y/Y for the 7th straight month. Our take is that as austerity measures squeeze the consumer over the next years, we wouldn’t expect to see domestic car purchases improve materially over the intermediate to longer term. It’s worth noting the difficult compares in the chart below, in particular due to the success of the cash-for-clunkers rebate program in 2009. Bullish prospects remain for European auto manufacturers as order flow continues from the client, China, and greater Asia.


Europe’s Inflections - m3


Matthew Hedrick



TODAY’S S&P 500 SET-UP - November 16, 2010

As we look at today’s set up for the S&P 500, the range is 22 points or -0.65% downside to 1190 and 119.% upside to 1212.  Equity futures are trading below fair value as investors become increasingly skeptical about QE2's ability to address the major issues facing the US economy as evidenced by the rise in the yield curve towards the end of yesterday's session. Heavy falls in China have also hit sentiment which has seeped into European markets. Today sees several macro releases including PPI, Industrial Production, Capacity Utilization, and NAHB Housing Market Index.

  • Abraxas Petroleum (AXAS) reported 3Q adj. EPS 2c loss vs. est. 2c profit
  • Aeropostale (ARO) boosted share-repurchase program by $300m, bringing total to $1.15b
  • Bank of New York Mellon (BK): Berkshire Hathaway disclosed stake of 1.99m shrs as of Sept. 30
  • Nordstrom (JWN) sees fiscal 2010 EPS $2.60-$2.65-shr, had seen $2.50-$2.65 Aug 12, vs est. $2.65
  • RightNow Technologies (RNOW) plans offering of $125m 20-year convertible senior notes
  • TD Ameritrade Holding (AMTD) said client trades per day in Oct. were up 14% from the previous month, down 14% Y/y
  • Urban Outfitters (URBN) sees 4Q comps consistent with 3Q, reported 3Q rev. $573.6m vs est. $578.3m


  • One day: Dow +0.08%, S&P (0.12%), Nasdaq (0.17%), Russell +0.09%
  • Month-to-date: Dow +0.75%, S&P +1.22%, Nasdaq +0.26%, Russell +2.36%
  • Quarter-to-date: Dow +3.84%, S&P +4.96%, Nasdaq +6.13%, Russell +6.48%
  • Year-to-date: Dow +7.42%, S&P +7.41%, Nasdaq +10.78%, Russell +15.12%
  • Sector Performance: Financials +0.44%, Utilities +0.34%, Industrials +0.31%, Consumer Staples 0.03%, Healthcare 0.03%, Consumer Discretionary (0.19%), Tech (0.29%), Energy (0.51%), and Materials (0.79%)
  • MARKET LEADING/LAGGING STOCKS YESTERDAY: Ford +4.29%, EK +3.46% and Colgate Palmoliv +2.34%/Pulte -5.47%, Akami -5.08% and Sprint -4.96%.


  • ADVANCE/DECLINE LINE: 185 (+1792)  
  • VOLUME: NYSE: 879.52 (-13.18%)
  • VIX: 20.20 -1.99% - YTD PERFORMANCE: (-6.94%) - BEARISH TREND
  • SPX PUT/CALL RATIO: 1.46 from 1.22 +19.43%  


  • TED SPREAD: 15.05 -0.710 (-4.508%)
  • 3-MONTH T-BILL YIELD: 0.14% +0.01%
  • YIELD CURVE: 2.39 from 2.25


  • CRB: 306.02 +0.80%
  • Oil: 84.86 -0.02% - BULLISH
  • COPPER: 391.80 +0.51% - BULLISH
  • GOLD: 1,371.75 +0.48% - BULLISH


  • EURO: 1.3614 -0.56% - BEARISH
  • DOLLAR: 78.518 +0.56%  - BULLISH



European markets:

  • FTSE 100: (1.14%); DAX (0.34%); CAC 40 (1.12%)
  • Major indices are broadly lower in response to steep declines in China with Basic Resources, Construction, Industrial Goods and Banks hardest hit.
  • Pressure on Ireland to accept some form of EU bailout continues to unsettle investors with spreads on peripheral European soverign debt pushing wider again.
  • EU Finance Minister set to meet at 16:00 London time. Before that, Ireland's cabinet is set to discuss its 4-year fiscal plan. Spain and Greece tap bond markets.
  • Germany Nov ZEW current situation +81.5 vs cons +75 and prior +72.6
  • Eurozone Oct Inflation +1.9% y/y vs cons +1.9%
  • UK Oct CPI 3.2% y/y vs cons 3.1% and prior 3.1%, RPI +4.5% y/y vs cons +4.6% and prior +4.6%  

Asian markets:

  • Asian Markets: Nikkei (0.31%); Hang Seng (1.39%); Shanghai Composite (3.98%)
  • Worries about speculation of Chinese monetary policy tightening and European sovereign debt caused caution to reign in Asian markets, which mostly fell today.
  • Energy shares fell on lower crude-oil prices.
  • Banks and BHP Billiton led Australia to a small gain. Australia & New Zealand Banking Group rose on a report that someone else would buy Lone Star Funds’s 51% stake in Korea Exchange Bank , though it pared its gains to 1% when it said it is still in due diligence.
  • Japan declined slightly, having been boosted by a weaker yen, but pressured by profit-taking and heavy selling in futures contracts. All Nippon Airways fell 2% on a report that passengers to China are falling even as ticket prices plummet.
  • South Korea fell after a 25-bp interest-rate increase.
  • Hong Kong fell on China’s afternoon drop. China property stocks fell on new restrictions on foreigners’ ability to buy property in the country.  Large-cap banks and energy shares took the brunt of the hit as China dropped fairly sharply again on worries about further monetary tightening and a report that the country would unveil food price controls.
  • Coal and metal stocks fell.
  • China Oct foreign direct investment +7.9% y/y.

Howard Penney
Managing Director

THE DAILY OUTLOOK - levels and trends













DKS: Supports our Bullish View on the Space

Crusher quarter for DKS. Inventories relative to sales and margins are among the best reported yet this EPS season. Yes, there are some elements that are DKS-specific. But we think it’s a signal of more to come in this space.



Nice, clean beat for DKS, with EPS coming in at $0.22 vs. our estimate and the Street at $0.17.

  • Q3 results primarily comp driven posting +5.1% versus outlook for +1%-2% with growth in each segment:
    • Core Dick’s up +3.8%; Golf Galaxy up +2.4%; and +82% increase in e-commerce – which was the greatest driver.
    • Better than expected profitability +150bps reflecting a sequential acceleration on the 2yr margin growth rate, with an even easier comp ahead in Q4 – could be early indications of positive benefits from closing underperforming GG stores.
    • Inventories up +5% on +9% sales growth reflecting considerably more stable spread relative to retail peers. This is key, as we are seeing 9 out of 10 retailers print a meaningfully unfavorable delta in both sales/inventory spread and margins (as represented by the SIGMA chart below).
    • Better than expected results despite facing difficult compares vs. last year when unseasonably colder weather pulled forward what management estimated to be $0.03 of sales forward from Q4.
    • Raised FY outlook:
      • Comp outlook for +3-4% in Q4. But what’s notable is that the company only needs +4.5% to keep comps flat on sequential basis. They’re giving conservative guidance – especially in the face of a strengthening product cycle. They’re giving themselves a pad as it relates to consumer weakness.
      • $0.06 EPS beat in Q3 AND raising FY EPS by $0.10 suggesting continued strength through Q4.

One thing that’s worth noting is that DKS’ apparel mix is 28% of total. This compares to Foot Locker at around 9%. People seem to think that it is only the brands and those that directly procure cotton that are in trouble. Not so – by a long shot. It is a cost that will be absorbed in all critical pressure points throughout the supply chain – from Asia, to the Brands, to the Retailers, to the Consumer. To think that DKS won’t feel some pressure here is simply irresponsible.  Let’s see how they address it on the call.


DKS: Supports our Bullish View on the Space - DKS CompG 11 10


DKS: Supports our Bullish View on the Space - DKS S 11 10