The Macau Metro Monitor, December 21st, 2010


Macau November CPI rose 3.93% YoY and 0.45% MoM.  Prices of outbound package tours were higher YoY and lower MoM.

NKE: It’s All on Nike U.S.

NKE will come through, again. 10% beat likely without futures rolling. Look for a major relaunch of Free. But given interconnected global risk, low short interest, key management stock sales, and the best sell-side sentiment since October ’08 (14 Buys and no Sells) Nike NEEDS the US to lead. The good news is that it is.


On some level, I think that NKE planned its May Fiscal Year just so they could keep shareholders walking on eggshells during holiday weak in addition to 2Q EPS. The eggshells aren’t warranted this time around. 


1) We’ve got Nike printing $0.96 in our model, which is 10% greater than the Street at $0.88. Importantly, this EPS algorithm starts with 10% sales growth levering to 28% in EPS growth; showing improvement in both Gross and SG&A simultaneously for the first time since 2Q08.


2) It would be very uncharacteristic of Nike to change guidance at this time of the year. The caveat is that if they smoke the quarter (our estimates count as at least a puff or two) Don Blair has all the ammo he needs to keep forward hurdles low; raw material costs, more air freight to keep up with strong demand, quadrupling in apparel R&D budget, to name a few.


3) Sustainability of Futures. The biggest question for everyone that cares about Nike – or anyone that even grazes some part of Nike’s supply chain – is whether or not Nike can sustain its North American growth. While this is usually not on the top of our list given how broad Nike’s portfolio has become. But let’s face some facts…the setup in Europe and Asia is not setting up to be pretty into 2011. Check out the charts below where you’ll find eroding consumer confidence pretty much everywhere. The US actually looks good by comparison. In other words… for one of the first times in years, Nike ABSOLUTELY needs the US to hold on tight.


Given the importance of North America, let’s dissect the 14% futures number we saw last quarter. 14% growth over the next 2 quarters is the equivalent of adding $289mm in new business (assuming that 85% of the base is on the Futures program). This number annualized is bigger than the ENTIRE US BUSINESS for over 90% of the footwear brands in the world. The good news is that the number is balanced over footwear and apparel. That definitely makes this number more easily digestible.


NKE: It’s All on Nike U.S. - NKE Fut 12 10

NKE: It’s All on Nike U.S. - NKE Fut 2 12 10

NKE: It’s All on Nike U.S. - NKE Fut 3 12 10


Precise quantification of this order number is tough. But here’s our best crack. When we add up comp and square footage growth by customer and by channel, we get to about $128m top line growth for the YEAR – or about 2.5%. Now…this excludes growth in Nike retail and – both of which should take the aggregate growth rate on a reported basis for Nike up by another 2-3 points. So what we need is to justify doubling this growth rate again due to market share gains in order to get to 14%.


This is very much realistic. But here are a few considerations.


1) Free: I think that Nike has done an admirable job in hiding from the outside world how bothered they are by missing out on the Toning category. That’s not to say that they want to have been first to market with a ‘tush toner’.  But does anyone remember Nike Free? This is a technology that Nike debuted around 2005 – the same time that Adidas bought Reebok and immediately started to seed share to Nike (their combined share went from 17% to 6%).


So what are we left with? The toning category has taken off, the book “Born to Run” was on the NYT best sellers list.  (This focused on a group of hardcore runners and Mexican tribes who would run (often barefoot) as a way to minimize injury and maximize speed and safety.)  And all the while, Nike is left out in the cold even though they invented the technology to lead this category.


Translation = the tools, molds and other capital equipment to produce these shoes en masse have already been amortized. My sense therein is that we’re going to see a MAJOR re-launch of ‘Free’.


This should be showing up in Futures today. (and we probably saw some last qtr).


2) Endorsements: Yes, we’re in a solid R&D cycle. But with that comes an Athlete Endorsement. We already saw Nike outbid for the NFL contract. It dropped Tom Brady, who was then picked up by UA. It also goes down the curve to athletes like Allyson Felix, who Nike recently took from Adidas. To those that don’t know, Felix is one of the top sprinters in the world and is a solid brand statement (recently had a full billboard in Times Square).


3) Global Interconnected Risk: Not that many people ask me about the Macro side of Nike. But they should. While being the clear leader in a Global Duopoly with a fixed structural forex and sourcing advantage, the company is not immune to global turmoil. They have bucked it in the past – but we cannot give a free pass – even for a company like Nike.


4) Model Shift: We’ve been looking at Nike as a sheer top line growth story with improving Gross Margins. As we anniversary World Cup, the top line will still be there, though margins should be driven more by SG&A and FX hedges. Same result, but different path. The risk is whether Mr. Market will give the stock the same multiple in trading GM for SG&A/FX.


  Europe (Western): Largely stronger on a sequential basis

- Most significant consumer confidence ramp with four consecutive months of positive retail sales - the longest such streak in more than 5-years before turning slightly negative in October.


  Europe (Eastern/Central):

      - Russia rolling over slightly relatively to Q1


  Key issues/events across Europe:

      - Consumer Pullback from Austerity measures issued or discussed, many enacted for Jan. 1, 2011

      - Austerity measures in Ireland, UK, Spain, Portugal, Italy, France, Greece, Hungary, Romania

      - World Cup spill over early into the qtr 


  Euro - GDP:


NKE: It’s All on Nike U.S. - NKE Eur GDP 12 10


NKE: It’s All on Nike U.S. - NKE Eur Cons RSales 12 10


NKE: It’s All on Nike U.S. - NKE Ger Cons RSales 12 10


NKE: It’s All on Nike U.S. - NKE Russ Cons RSales 12 10


  China: Retail sales growth stable in low 20s while confidence is beginning to roll


NKE: It’s All on Nike U.S. - NKE China Cons RSales 12 10


  Japan: Rolling over hard relative to Q1

- stimulus measures and policy changes helped buoy the Japanese consumer in 3Q10, including a subsidy for energy-efficient cars and a tobacco tax hike scheduled for October 1st. Both programs pulled forward consumer demand to the tune of a 0.7 point contribution to 3Q10 GDP, after having no contribution from private consumption in 2Q10. In addition, Japan’s hottest summer in over a century fueled demand for cooling products. These tailwinds helped boost 3Q10 GDP growth to +3.9% QoQ SAAR and their absence will create a drag on growth in 4Q10 and potentially into 1Q11 – just around the time bearish 4Q10 economic data is being reported in globally. (11/30/10 Macro post )


NKE: It’s All on Nike U.S. - NKE Japan Cons RSales 12 10


  South America:

      - Brazil - retail sales started to slow heading into Nov though relatively flat with Q1


NKE: It’s All on Nike U.S. - NKE Brazil Cons RSales 12 10


  Fx: Nearly 1% drag on top-line in Q2


NKE: It’s All on Nike U.S. - NKE Fx 12 20 10





Conclusion: Overall no great surprises but LongHorn exceeded expectations while Red Lobster once again disappointed.  I will have another post out tomorrow after the earnings call.


Darden International is not cited regularly as a bell weather for consumer spending, but I think the company’s performance offers an interesting, if small, glimpse at the state of the consumer.  The news out of Washington of late has led to more questions than answers.  From a MACRO perspective, it will be interesting to see if this momentum will continue once the holiday season high subsides and the hangovers set in.  Whether or not companies continue to invest in their concepts will likely be a huge differentiator in 1Q11 as the holiday season ends. 


Clearly, for whatever reason, the mood of the consumer has been stronger of late and the better-positioned concepts are performing well.  In Darden’s case, LongHorn is leading the way with mid-single digit traffic growth, The Olive Garden’s comparable restaurant sales are in the low-single digit range, and Red Lobster’s comparable restaurant sales figures have deteriorated on a two-year average basis for the past three consecutive quarters.


Darden has spent considerably amounts in investing in LongHorn and the results from that concept today are impressive.  As you can see in the chart below, LongHorn almost beat the street consensus for comparable restaurant sales by a factor of two.  The stellar performance of LongHorn will likely distract investors from the never ending turnaround that is Red Lobster.  However, heading into tougher comps in 3Q11, coupled with the prospect of elevated beef prices, could put more of a deadline on Red Lobster’s ever-pending revival.


I expect management to strike a cautious tone with respect to top line trends.  A sequential slowing was clearly evident in trends at LongHorn over the course of the quarter.  One line-item that will need to be addressed is labor, which declined by ~120 basis points year-over-year.








Howard Penney

Managing Director

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Zappos/Amazon = Incumbents Should Be Afraid

AMZN/Zappos is growing into more of a formidable competitor in softline retail than many people think. Hsieh' goal of $1Bn going to $5Bn would get this name in the top 5 apparel/footwear retailers by today's metrics. Only internet sales tax could slow this beast down.



Here’s some food for thought for all you Holiday on-line ‘shop-a-holics’. Remember Tony Hsieh? Yeah…he’s the dude that created Zappos from scratch, and ultimately sold it to Amazon last year for $888million.


We all knew the deal sounded expensive – but that’s without considering what Amazon would gain from the transaction – most notably talent to scale up both the footwear and apparel market. That’s about a $350billion opportunity.


To be clear, Amazon’s apparel offering in the past has been abysmal. It’s gotten a bit better, and will continue to do so. But Footwear has clearly improved at both Amazon (i.e. New Balance/Heidi Klum) and Zappos alike. There’s still a lot of room to go if AMZN ultimately wants to make money in footwear, such as weaning the consumer off the free-shipping model at Zappos – or getting smart with leveraging other ‘sticky marketing’ tactics (like Amazon Prime – which is evil for a shop-a-holic who’s trying to get sober).


Here’s a recent quote from Hsieh that is absolutely worth noting.


“For the next couple of years, we are moving into clothing. we started out in footwear but clothing is actually a much larger market. It should be enough to take us to $5 billion.” What does all that mean? He thinks that this deal will be a 5-bagger for his company. $1bn in sales going to $5bn?


Those are some mighty big numbers. Consider this…Zappos hitting $5Bn in sales would make it the 10th largest apparel/footwear retailer in the US. If you add in Core Amazon it climbs into the Top 5. 


Nothing says it all better than the picture below outlining Hsies’ collective vision with Amazon.



Zappos/Amazon = Incumbents Should Be Afraid - zap


Fashionable Consensus

This note was originally published at 8am on December 20, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Nothing is more obstinate than a fashionable consensus.”

-Margaret Thatcher


You’d think that some of the sell side’s finest would have learned something from being unanimously bullish on the US stock market in December 2007. Think again. It’s December of 2010 and, after a few minor bailouts and major bonus seasons, the bulls are back.


Don’t wince. Without a Fashionable Consensus, how else would we generate long term absolute returns? This weekend’s edition of Barron’s “Outlook For 2011” may be one of the finest gifts of Groupthink that we’ve been offered in years.


As Barron’s themselves reminds risk managers (not in the cover story article), the SP500 has only seen double-digit gains for 3 consecutive years twice since World War II (1951 and 1994). Looking at the bullish 2011 predictions for US stocks that way, maybe consensus is contrarian!


Will 2011 mark a 3rd year in a row of double-digit gains?


Well, let’s go through that…


Let’s start with a level. My immediate term TRADE zone of resistance for the SP500 into year-end is 1249-1256. Giving year-end bonus and mark-up season the bullish benefit of the doubt, let’s use the top end of that range and round the number up to 1256.


Since a +10% or better gain in the SP500 for 2011 (versus 1256) = 1382, let’s take a gander at who is more bullish than that:

  1. Deutsche Bank = 1550
  2. Goldman Sachs = 1450
  3. JP Morgan (formerly known as partly Bear Stearns) = 1425
  4. Barclays (formerly known as Lehman) = 1420
  5. Bank of America (formerly known as partly Merrill) = 1400

Now, to be fair, we’ll need to provide some disclosures (it’s a sell side thing)

*the aforementioned 2011 targets are from last week’s Bloomberg survey and subject to revision

**some of these estimates are the mid-point of Big Broker’s internal range (that’s a CYA thing)

***some estimates are from economists and bond strategists (yes, on Wall Street, cops are sometimes firefighters for commission)


The only person we can find who is more bullish than Binky Chada at Deutsche Bank isn’t a sell-sider, but he was equally as Bullish As Binky back in 2008. Don Luskin called for a +30% move in US stocks when I debated him on Kudlow on Friday night. Luskin’s made for YouTubing estimate implies a +377 point move in the SP500 to all-time highs in 2011 to 1633.


Now let’s not get caught up in what’s going on in the rest of the world this morning (Global Growth Slowing, Inflation Accelerating, and Interconnected Risk Compounding). Chinese stocks closed down for the 4th straight session to -13% for 2010 YTD and the CRB Commodities Index level of 320 is +25.5% inflated since the beginning of July.


Per the US stock market centric bulls, these interconnected global economic realities don’t matter, until they do.


Let’s get back to the US stock market’s 2011 Fashionable Consensus and dig a little deeper into its tapestry.

  1. Everyone loves Tech
  2. Everyone (except Doug Cliggott at CS) hates Healthcare
  3. Everyone has no short ideas

Most risk managers realize that doing what everyone else is doing isn’t a great idea (especially if you want to charge your clients 2 and 20). That’s why I’m short Tech (XLK) and Industrials (XLI) going into year-end. Both are reaching extreme levels of being intermediate-term TREND overbought.


I’m bearish on US Equities (SPY) and US Bonds (SHY). I’m bullish on the US Dollar (UUP).  As a result, I’m bullish on building up a large cash position as we head into what I think is going to be at least a 7% correction in the next 3-6 months (SP500 downside target = 1168).


No, I’m not reckless enough to give you my “year-end target” for the SP500 (that’s what unaccountable Big Brokers do). But I will tell you what I think every day between now and then. I’ll tell you what my upside/downside probabilities are across my 3 investment durations (TRADE, TREND, and TAIL), and I’ll take a long or short position that I’m accountable to.


If I’m wrong on US Equities in the next 3-6 months, I think some combination of the scenario laid out by Jeff Knight at Putnam (buy side PM) and Doug Cliggott (ex buy-sider at Credit Suisse) has the highest probability. Upside in the SP500 to the 1325-1350 range with the two sectors that I think auger best to an environment of US style Jobless Stagflation (Energy and Healthcare) outperforming.


My immediate term TRADE lines of support and resistance lines for the SP500 are now 1236 and 1249, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fashionable Consensus - thatcher

Sino-Russian Relations

Position: Long Lukoil (LUKOY), CNOOC (CEO)


After China and Russia announced in late November that they will no longer use the US dollar to conduct bilateral trade, last Wednesday marked the official start to trading the Yuan against the Ruble on Moscow’s Micex exchange.  (China allowed the Yuan to trade versus the Ruble on its interbank market beginning on Nov. 22). China’s Ambassador to Moscow Li Hui said, “No doubt this will become a serious catalyst for economics and trade.”  


Indeed. However, we’d note that the move is not a geopolitical game-changer; certainly it does represent concerted action by two global heavyweights following months of rhetoric that the USD must be replaced as the world’s global reserve currency.


Yet given this diversification away from the USD, we still don’t see another currency (or commodity) that’s a close second as an immediate replacement - certainly talk of the Euro as the new stalwart died hard alongside Europe’s sovereign debt crisis that came to a head in the first half of the year.  While we’re quick to point out that the US will have its days of reckoning (following Europe) in dealing with its own fiscal imbalances, which should weigh to the downside on the USD, we’re not of the camp that the USD is going to the wayside as the world’s reserve currency anytime soon.


However, from a local perspective, the opening of the RUB-CNY currency cross (in both countries) should equate to an increase in trade between the two in the coming years, a relationship built on mutual needs: in particular energy long Russia is well equipped to provide for energy short China and Russia benefits from “cheap” consumer and electronic goods from China.


Further, as the Yuan is more freely traded against the currencies of its trading partners and the USD is removed as the “third-party” currency, mutual benefits are provided to both importers and exporters as transaction costs are reduced.


As of 2009, China’s total exports to Russia accounted for 2% of its global exports, and Chinese imports from Russia accounted for ~ 1.5% of its total imports.  While Russia does not offer an individual breakout of its imports or exports by country, Russia’s trade with China (exports plus imports) makes up about 9.6% of its total trade. For comparison, Russia’s next largest trading partners are the Netherlands (9.6%) and Germany (8.3%). From a regional perspective, Russia’s largest trading partners are the Eurozone (49.5%) and CIS (13.7%), a consortium of former Soviet states.


Clearly the data suggests there’s a long runway of upside potential in Russian-Chinese trade relations.  In early 2009 we wrote about a $25 Billion loan-for-oil agreement between both governments as a catalyst for the beginning of a greater partnership. In that deal, the Development Bank of China lent Russia’s state-owned energy companies the funds to build out their infrastructure, including a 41-mile pipeline extending from a refinery on the East Siberia Pacific Ocean to the Russian-Chinese border town of Xing’an with an annual capacity of 15 million tons of oil, expected to come online in January 2011.


While Russia provided China with 6.5% of its total oil imports in 2008 and 7.8% in 2009, this new pipeline has the potential to double the volume of Russian oil deliveries to China!


As both countries can better leverage each other, we like the mutual gains that each will enjoy. In particular, if Russia can continue to bring in Chinese capital it will support not only development in its dominant energy and commodity sectors, but also encourage economic diversification, an aim voiced loudly by the Kremlin over the last two years. On the other hand, cash-rich China can improve energy channels through strategic financing and acquisition deals to better supply its economic expansion, while capturing (in some cases) price security and future leverage against its other energy suppliers.  


From an investment perspective, we see opportunities in this symbiotic relationship. In the Hedgeye Portfolio we’re currently long Russia’s Lukoil (LUKOY) and China’s CNOOC (CEO). If you’d like to learn more about our energy research, headed by Lou Gagliardi, please contact .


Matthew Hedrick



Sino-Russian Relations - Ru

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