TODAY’S S&P 500 SET-UP - June 10, 2011


This morning’s early look on the data will look “quiet” to US centric investors, but the rest of the world doesn’t cease to exist. Asian Equities (and currencies) look flat out ugly right now as the data continues to support Growth Slowing.

  1. India’s Industrial Production dropped again in April to +6.3% y/y vs +8.8% last month (we’re short INP)
  2. Chinese imports were fine (internal demand) but Exports were another miss (external demand) at +19%
  3. KOSPI finally broke its intermediate term TREND line of support (2077), down -1.2% overnight

Oil and Russia both rallied yesterday to lower-highs but remain broken on intermediate-term TREND (WTIC Oil TREND resist = $102.96), so we’ll be looking to short Russian and Energy stocks today.  As we look at today’s set up for the S&P 500, the range is 43 points or -2.17% downside to 1261 and 1.16% upside to 1304.






THE HEDGEYE DAILY OUTLOOK - daily sector view


THE HEDGEYE DAILY OUTLOOK - global performance




  • ADVANCE/DECLINE LINE: +835 (+2272)  
  • VOLUME: NYSE 909.51 (-10.21%)
  • VIX:  17.77 -5.43% YTD PERFORMANCE: +0.11%
  • SPX PUT/CALL RATIO: 1.43 from 1.77 (-19.53%)



  • TED SPREAD: 21.39
  • 3-MONTH T-BILL YIELD: 0.05%
  • 10-Year: 3.01 from 2.98
  • YIELD CURVE: 2.58 from 2.59 



  • 8:30 a.m.: U.S. Import Price, est. (-0.7%), prior 2.2%
  • 9 a.m.: Fed’s Dudley to speak in Brooklyn
  • 1 p.m.: Baker Hughes rig count
  • 2 p.m.: Monthly budget statement, est. (-$136.0b), prior (-$135.9b) 


  • Bundesbank sees German 2011 GDP +3.1% and 2012 GDP +1.8%
  • German Bundestag votes in favour of motion to approve new aid for Greece -- wires
  • UK Apr Manufacturing output +1.3% y/y vs consensus +3.3% and prior revised +2.2 from +2.7%
  • Ally Financial delayed plans to start marketing an IPO until equity markets improve
  • Obama may name Thomas J. Curry head of the Office of the Comptroller of the Currency, the New York Times said
  • Samsonite sold shares at the bottom end of a revised price range in its Hong Kong IPO, raising $1.25b
  • The California Public Utilities Commission opened an investigation of AT&T Inc.’s proposed purchase of T-Mobile USA



THE HEDGEYE DAILY OUTLOOK - daily commodity view




  • Crop Weather Mayhem Delays U.S. Corn, Rice Planting as Prices Extend Gains
  • Oil Near Highest This Month Heads for Weekly Gain on U.S. Economy, OPEC
  • Copper Declines on Reduced Imports Into China, World’s Biggest Consumer
  • Soybeans Fall for Second Day as Stocks Estimate May Signal Weaker Demand
  • Soybean Imports Climbing in China Poised to Increase Domestic Inventories
  • Gold May Advance on Concern About Europe’s Debt Crisis, Weakening Growth
  • Copper Imports by China Drop in May as Consumers Run Down Local Stockpiles
  • Cocoa Output From Indonesia May Slump 13% as Black Pod Spreads, Group Says
  • U.S.-South Korea Trade-Accord Delay to Hurt Pork Exports, Official Says
  • Oil May Decline Next Week on Signals Economic Growth to Slow, Survey Shows




THE HEDGEYE DAILY OUTLOOK - daily currency view




  • EUROPE: an ugly day away from DAX (up small on better CPI), Spain/Italy/Greece remain broken and now Russia failing at the TREND line 1,959.
  • Germany: May final CPI +2.3% y/y vs prelim +2.3%; May wholesale price index +8.9% y/y vs consensus +8.6%
  • France Apr Industrial Output (0.3%) m/m vs consensus +0.4%
  • UK Apr Manufacturing output +1.3% y/y vs consensus +3.3%; Industrial output y/y (1.2%) y/y vs consensus +1.3%
  • UK May PPI Core +3.4% y/y vs consensus +3.4%, prior revised +3.6% from +3.4%


THE HEDGEYE DAILY OUTLOOK - euro performance




  • ASIA: mixed except Japan; KOSPI down -1.2% breaking its TREND line of 2077; India down another -1% to -11.2% YTD (were short); China no bounce; HK broken

THE HEDGEYE DAILY OUTLOOK - asia performance








Howard Penney

Managing Director

American Optimism

“He had shown himself to be … a young man who took great pride in his perseverance and steadiness of purpose.”

-Stephen Ambrose


A month or so ago I referenced researching more about the roots of Jeffersonian thought (an alternative to British Keynesianism). Being a Canadian who is constantly thirsting to be educated in American history, I often lean on my American-born colleagues for reading recommendations.


One of our analysts, Allison Kaptur, pointed me towards Stephen Ambrose’s “Undaunted Courage” – the story of Meriwether Lewis, Thomas Jefferson, and the Opening of the American West. It was easily one of the most gripping and inspirational stories I have ever read.


The way the best storytelling is told is when the author personalizes the experience and reaches in and grabs you. Many of you will be familiar with the late Stephen Ambrose for his work in “Band of Brothers.” Many of you may not be familiar with the passion Ambrose had for backpacking every step of the Lewis & Clark Trail with his family.


“Of courage undaunted” was the opening description of Thomas Jefferson’s praise for Meriwether Lewis. It’s where Ambrose’s wife, Alice, came up with the idea for the title of the book. As Ambrose acknowledges best in answering the question, “what is the secret to being a successful author?” – “Marry an English major.”


Lewis never married. He died, tragically, at the very young age of 35 years old in Hohenwald, Tennessee, shortly after being appointed by Jefferson as the Governor of Louisiana in 1806. While it would be easy to tell stories about how messed up Meriwether’s mind became in his final years, I think it’s best for Americans to celebrate the confidence and courage it took for him to change the world.


“At eighteen years old, he was on his own. He had travelled extensively across the southern part of the Unites States. He had shown himself to be a self-reliant, self contained, self confident teenager…” (Ambrose, “Undaunted Courage”, page 29)


After 6 consecutive down weeks for US stocks, I’m calling attention to this story after being inspired by a great American Olympian who I have the pleasure and privilege of working alongside at Hedgeye – Bob Brooke.


On Wednesday night, Bob, Big Alberta, Darius Dale, Kevin Kaiser, and I were having a few beverages watching Game 4 of the Stanley Cup Playoffs with our summer interns. After proudly attending his son’s graduation at a very patriotic ceremony at Notre Dame, Bob told me it was a good time to think about a way to communicate to our clients how optimistic we are about the future.


You see, Wall Street and Washington like to put people like us in boxes. When you’re always thinking inside of the box – I guess that makes sense. You’re either a Bull or a Bear, a Democrat or a Republican – and it’s easier for these group-thinkers to generalize and not take the time to understand what something new could mean.


Just because I am bearish on US Equities, old Wall Street, and Keynesian Central Planning in Washington, doesn’t mean I don’t have the confidence and courage to put my own capital at risk to build a great team in this great country.


In fact, it’s quite the opposite – everything I am pessimistic about, gives birth to my optimism.


At the Hedgeye Holiday Party this past December, I cited a very popular American country song titled “Bless the Broken Road” (recent rendition by Rascal Flatts) to better explain why it’s our industry itself that gives me reason for optimism:


Every long lost dream led me to where you are
Others who broke my heart they were like Northern stars
Pointing me on my way into your loving arms
This much I know is true
That God blessed the broken road
That led me straight to you


Without giving away Hedgeye’s strategy to continue to be the change we want to see in this profession, that’s all I have to say about that. If Wall Street and Washington don’t realize that the most simple solution to all of this is to stop what they are doing, then the rest of us will just have to keep plugging away until we’ve reached the new open frontier of American Optimism that’s as old as America itself.


My immediate-term support and resistance ranges for Gold, Oil, and the SP500 are now $1, $98.46-102.91, and 1, respectively.


God Bless America,



Keith R. McCullough
Chief Executive Officer


American Optimism - Chart of the Day


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UA: What Would Ray Lewis Do?

UA said all the right things at its analyst meeting – and it wasn’t smoke in mirrors. But growth isn’t linear, and we think that investment capital flows take the stock lower before it takes its next tear upward (as much as we disagree with Wall Street’s rational for doing so).



I’m sitting on an Amtrak from UA’s analyst meeting in Baltimore back up to New Haven, and have a mixed analytical read to say the least.  I’m trying to ignore the fact that I am sitting next to Ray Lewis…No joke.  The dude is completely decked out in UA from head to toe…and he wears it well. (Note to self…I gotta start working out). We’re sitting here eating our Caesar Salads, and I have the screen brightness on my mac as low as possible so he can’t see what I’m typing. If he sees me write anything negative about the brand he knows and loves, I am mildly concerned that he’ll snap my left arm like a pencil.  Heck, maybe I’ll roll the dice let him read this when I’m done.


The punchline out of the UA meeting was very poignant. These guys are going to grow, grow, grow. The reality is that this is not exactly a change from the plan all along. Remember that UA could have been printing an operating margin double its 10-11% over the past 8 years if it desired to do so. But instead, it has reinvested in growth. That’s why it’s growing organically today at 20-30%. It’s also why they’ll keep doing that for the next 5 years at a minimum.


The only new target thrown out today was that the company would double sales in 3 years – that’s a 28% top line CAGR. What I like here is that it is not just coming from US apparel. Consumer direct going from 6% of sales, to 10% (now)  to 23% by 2013 and ultimately 2030 is a massively ambitious goal. But that will help UA achieve these consumer-direct ratios that are double that of other brands.


It’s interesting to think about it, actually. Being such a young brand is a double edged sword. On one hand, they still have a lot of money to spend to get the size and scale to compete on a global cross-gender multi-sport basis with its rivals. But on the flip side, it is not hostage to the legacy processes that the traditional brands are married  to as it relates to building a business from scratch. They can shake the Etch a Sketch clean, and literally start fresh. This is particularly an opportunity for Gene McCarthy in building the footwear business, which we think already has a turn time that rivals Nike, and will only get better on the margin.


Despite the hyper top line, however, management made it clear that it will not be afraid to spend money to achieve its goals. That’s fine with me. This is a business where you need to spend money to make money. Also, despite what doubters may think, this company has proven to be an ardent steward of capital in recent years.


All that said, capital investment and realization of financial rewards are not simultaneous nor are they linear. Unfortunately, the former needs to come first.

We continue to contend that UA is in an investment period today – in SG&A (Tom Brady, Cam Newton – current charges plus off balance sheet liabilities), cape (building store count to 80 by end of year), and working capital (building a footwear business and filling retail stores with product.)


People focus on sales momentum and EPS growth with this name, but another key stock driver is the cadence of SG&A combined with Capex and Working Capital. When all are headed in the same direction, the stock almost always goes the other way.


Again, to say this brand is killer would be a massive understatement.  To say that the management  team has grown in breadth, depth and maturity is as well. My confidence level walking out of the meeting into the 100 degree Baltimore sun was quite high that this is one of those unique Consumer companies that will defy growth projections time and time again and will threaten Adidas as the #2 global athletic brand.


But we know that this is a punitive market. As working capital squeezes, our sense is that the stock will trade down on the margin.

The sentiment on the name is close to all time highs (78x), the stock is still peaky, and management stock sales have accelerated. (See our sentiment chart below).


When we put on our TAIL duration hat (3 years or less), we absolutely want to own this name. But holding true to our risk management framework, the TREND and TRADE don’t look compelling. We’ll hold on and look to buy this great company at a better price.


(I’ll leave it up to you to guess if Lewis read this note).


UA: What Would Ray Lewis Do? - 1


UA: What Would Ray Lewis Do? - 2


We caught up with CFO Mark Robinow for lunch today.  The obvious first issue on the table was the departure the CEO Mark Buehler.  Robinow was very straight forward in saying that the Buehler and the board decided that the company need to find a CEO that would reside in Phoenix.  Importantly, it had nothing to do with the operations; in fact, according to Robinow, the company is operationally stronger that it was 18 months ago. 


A couple of other key takeaways from lunch:

  1. Business trends remain on track - the Kona recovery story is alive and well.
  2. The remodel program is probably ahead of plan and we should see a positive impact to 4Q comps.  The remodeling of the seven stores should be completed in time for the holiday season.
  3. Commodity costs remain an issue, as for all restaurant companies, but the overriding message was that costs are manageable.
  4. From a growth perspective, the company is currently negotiating leases for 2012 and 2012.
  5. Management is looking to close under-performing stores.

Despite the recent price action in the stock (before today), I continue to see KONA as one of the better-positioned small cap names in the restaurant space.





Howard Penney

Managing Director

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 80.46%
  • SHORT SIGNALS 78.35%