TODAY’S S&P 500 SET-UP - September 23, 2011


As we look at today’s set up for the S&P 500, the range is 47 points or -0.93% downside to 1119 and 3.23% upside to 1166.











  • ADVANCE/DECLINE LINE: -2395 (-243) 
  • VOLUME: NYSE 1716.20 (+41.80%)
  • VIX:  41.35 +10.80% YTD PERFORMANCE: +132.96%
  • SPX PUT/CALL RATIO: 2.75 from 2.66 (+3.62%)




UST YIELD CURVE: heavy and compressing if dropped on your head; 152bps wide, new low for the cycle; very bad for banks


10YR UST Yields hitting record lows as academics refer to chapter 2 on buy stocks when bond yields are?

  • TED SPREAD: 35.80
  • 3-MONTH T-BILL YIELD: 0.00%
  • 10-Year: 1.72 from 1.88     
  • YIELD CURVE: 1.52 from 1.67

 MACRO DATA POINTS (Bloomberg Estimates):

  • 1 p.m.: Baker Hughes rig count
  • 1:30 p.m.: Fed’s Dudley to speak on panel in Washington D.C.
  • 2:45 p.m.: Fed’s Williams on unconventional monetary policy in Zurich
  • 4:30 p.m.: ECB’s Trichet speaks in Washington


  • IMF/World Bank meetings take place and go over the weekend. Today, watch for comments from IMF Managing Director Lagarde, Fed President Dudley, Citigroup CEO Pandit, ECB President Trichet
  • Reliance Industries said to be studying possible purchases of shale-gas assets in Canada; may also invest in clean- energy ventures
  • Solyndra CEO Brian Harrison and CFO W.G. Stover appear before the House Energy and Commerce Committee
  • Hewlett-Packard CEO Meg Whitman plans to stick by strategies set in motion by her predecessor
  • Napster founder Sean Parker, Ron Burkle may partner on bid for EMI, N.Y. Post says
  • Liberty Media’s spinoffs of Liberty Capital, Liberty Starz tracking stocks may be completed
  • Bank of America said to be in talks to sell its stake in the biggest U.S. Pizza Hut franchisee for more than $800m



COMMODITIES: disaster continues for hedge funds (Hedgeye has a 0% asset allocation to Commodities and reiterate that call this morning, long USD)





  • Copper, Nickel, Tin Slump on European Debt, Global Growth Risk
  • Commodities Set for Worst Week in Four Months as Metals Tumble
  • China Coal Outage to Spur Imports as Prices Rise: Energy Markets
  • Gold Set for Worst Week in More Than 4 Months on Global Selloff
  • Oil Rises After Sliding to Six-Week Low; Heads for Weekly Drop
  • Record Harvest Cooling Inflation Checks Yield Rise: India Credit
  • Goldman Sticks With ‘Resilient’ Commodities on Supply Risks
  • Gold May Gain on Fed Measures, Europe Concerns, Survey Shows
  • Copper Extends Drop to Lowest Since August 2010: LME Preview
  • Deere CEO Won’t Let Asia Rice Paddy Sink $50 Billion Sales Goal
  • Peruvian Congress Approves Law Setting Mining Tax on Profits
  • Copper, Nickel, Tin Tumble on Debt, Growth Concerns
  • Iron Ore’s Four-Year Slide Hitting Mining Earnings: Commodities
  • Palm Oil Declines as Growing Recession Concerns Reduce Demand
  • Soybeans Set for Worst Weekly Loss in 2 Years on Demand Concern
  • Gold May Drop as Investors Sell to Cover Losses in Other Assets
  • Europe Central Banks’ Gold Sales Set for Least Since 1999 Accord
  • Oil Erases Gain in New York as Finance Heads Discuss Growth Risk







EUROPE: contagion spreading to Russia (crashing -36% since May), Poland, and Austria (both markets down -1% this morning, never mind "bounce")


EUROPE: only "bounces" are in the largest hedge fund short position markets (Italy and Spain); DAX and CAC can barely sustain bids.






ASIA: there was no bounce; crashing in Korea and Hong Kong continue making the S&P 500 hostage to crash (-20% drawdown from April) mean reversion


KOREA: KOSPI smoked for another -5.7% drop, taking the crash since May 2 to -24%; Korean bank exec jumped out of his window last night; sad








Howard Penney

Managing Director

NKE: ...for all the right reasons.

Crusher quarter from the Nikester – ironically on one of the worst market days in a decade.


We were at $1.30 vs. the Street at $1.21 – and Nike’s $1.36 came in spot-on with our EBIT forecast, with a (sustainable) lower tax rate and shares outstanding making up the difference. Revenue was slightly stronger, offset by slightly higher SG&A – but that’s splitting hairs.


What we like is that revenue strength -- +17% (+13% constant currency) – came from the broadest cross section we can recall seeing in a while. Virtually all regions, both genders, and all key product categories performed extremely well. Recall that the crux of our Black Book (Nike: Lead, Follow, or Get Out of the Way) revolved around the company’s investments in recent years paying off in far greater magnitude and duration than is currently perceived to be the case. Women, Apparel and Retail all stepped up their game, which was also key to our call.


All things considered, the quarter – while outstanding – was right in line with our expectation.


A couple of points…

  1. Growth: We took our estimate – which was already $0.40 above the Street for the year at $5.20 – to $5.34. Next year we’re at $6.72, and then $7.87 for FY14. In the end we’re looking for 22% CAGR in earnings growth for the next three years. That’s tough to find for a $40bn market cap company.
  2. Irony: Six months ago, investors freaked out when NKE issued its downbeat gross margin forecast for 4Q11 and 1Q12 (both of which have been reported) and basically took rolled their EPS estimates back by a full year. Now, they’re rolling forward by a year. And guess what? They’ll still be too low…
  3. Repo: We’re liking the repo trend at Nike. This is the second consecutive quarter where shares outstanding were down 1% sequentially. Keep in mind that one of the greatest risks with Nike is the widening of the spread between RNOA and ROE (high class problem). They’ve been managing that better over the past few quarters through returning cash to shareholders than we’ve seen in a while.
  4. Basketball: By the fourth question in Q&A about a potential NBA strike, I was downright bummed that so much of management’s real estate was wasted on this topic by the sell side.  Consider this…
    1. Don’t look at Nike as the big loser in the event of a strike. That distinction belongs to VFC (major NBA licensee – Jerseys, etc…) and Genesco (Hat World, Lids). Nike does not sell officially sanctioned NBA product.
    2. True, basketball is a big business for Nike. It accounts for 44% of US footwear sales (running = 30%, Casual = 15%, training = 5%). But, and this is a BIG but, only 15% of basketball sales are seasonal. What does that mean? If you straight- line category sales over the course of the year at levels experienced in the off-season, and then looked at the incremental gain in-season. That amounts to about $750mm in annual revs on Nike’s base of $24bn.
    3. Of that $750bn, don’t think for a minute that it’s all a risk. With players not on the court, you can rest assured that they’ll be on the road supporting Nike marketing campaigns around basketball. Remember, they won’t be getting paid to play, so instead they’ll be getting paid to sell.  
    4. As for the basketball business outside the US – its less than half the proportion of total sales than it is here in the US. Do you think that people in Eastern Europe or China care if there’s an NBA season? Some probably do, but not likely to put a big dent in the business. Also keep in mind that basketball futures are up dd, and the buyers at retail placed those orders knowing full well that a strike is looming.
    5. Bottom line – I’m not worried.


NKE: ...for all the right reasons. - 9 22 2011 9 29 49 PM


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Cliff Notes From Our Eurozone Call

Earlier today, my colleagues and I hosted a call on the outlook for the Eurozone.  The replay is worth your time when you get a few minutes, but I wanted to flag two of the most critical components of the presentation, which were the slides that outlined the exposure of the German and French banks to the PIIGS.


I’ve posted them below, but they are worth printing off and taking into the next investment team meeting at your firm.  This is the crux of Europe.  Even the strong economies are only as strong as their banks.


To wit: 

  • German banks have €69.7 billion in capital and have a combined €523 billion in PIIGS exposure (non-bank private sector, banks, and sovereigns); and
  • French banks have €134 billion in capital and have a combined €671 billion in PIIGS exposure (non-bank private sector, banks, and sovereigns). 

The interconnected web of European debt and monetary policy is going to be a behemoth to untangle.


As Milton Friedman wrote in 1999:


“Once the euro physically replaces the separate currencies, how in the world do you get out? It’s a major crisis.”


We are long the U.S. dollar in the Virtual Portfolio via the etf UUP.


Daryl G. Jones

Director of Research 


Cliff Notes From Our Eurozone Call - 1


Cliff Notes From Our Eurozone Call - 2

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