TODAY’S S&P 500 SET-UP – March 23, 2012

As we look at today’s set up for the S&P 500, the range is 22 points or -01.28% downside to 1375 and 0.30% upside to 1397. 












  • ADVANCE/DECLINE LINE: -1508 (-1476) 
  • VOLUME: NYSE 762.96 (5.02%)
  • VIX:  15.57 2.91% YTD PERFORMANCE: -33.46%
  • SPX PUT/CALL RATIO: 2.49 from 3.27 (-23.85%)


US TREASURIES – the top in bond yields came last week when Credit Suisse said “buy stocks because bond yields are rising”; now it’s game time with TRADE line support for 10s at 2.27% and the long-term TAIL of resistance up at 2.47%. We are expecting to see a battle royal in this 20bps range. 

  • TED SPREAD: 40.25
  • 3-MONTH T-BILL YIELD: 0.07%
  • 10-Year: 2.26 from 2.28
  • YIELD CURVE: 1.90 from 1.92 

MACRO DATA POINTS (Bloomberg Estimates):

  • 10am: New-home sales, Feb., est. 325k (prior 321k)
  • 10am: New-home sales (M/m), Feb., est. 1.3% (prior -0.9%)
  • 1pm: Baker Hughes rig count
  • 1:45pm: Bernanke gives opening remarks at Fed central banking conference
  • 2:30pm: Fed’s Lockhart speaks in Washington


    • Mitt Romney, Rick Santorum, Newt Gingrich, Ron Paul campaign across Louisiana ahead of state’s Republican primary tomorrow
    • House, Senate not in session 


  • New-home purchases U.S. probably rose 1.3% in Feb. to 325k annual pace, highest level in more than a year, economists est.
  • Bats Global Markets priced 6.3m shrs at $16 each, low end of range
  • President Obama faces deadline today to make nomination for World Bank president
  • Manhattan office leasing in 1Q is poised to be lowest in almost three years: Studley
  • St. Louis Fed President James Bullard said U.S. monetary policy may be at turning point, Fed’s next interest-rate increase may come in late 2013
  • US Airways said to be discussing plan for AMR takeover with some creditors
  • Credit Suisse will start resupplying market with VelocityShares Daily 2x VIX Short-Term ETN, or TVIX, after cutting issuance off in February, causing market to whipsaw 


    • Darden Restaurants (DRI), 7am, est. $1.24     


  • Copper Bear Streak Extends as Manufacturing Shrinks: Commodities
  • Soybeans Rise as U.S. Growers May Shun Oilseeds in Favor of Corn
  • Copper Advances as Housing Report May Show Increased Purchases
  • Crude Rebounds From One-Week Low, Paring Decline for the Week
  • Palm Oil Jumps to 10-Month High on Malaysia Production Concerns
  • Commodity Brokers Get Shelter From Europe’s Shift to Exchanges
  • Gold May Advance From 10-Week Low as Weaker Dollar Spurs Demand
  • Glut Sends Gas Toward Worst Quarter Since 2010: Energy Markets
  • Rubber Set for Third Weekly Drop on Europe, China Demand Outlook
  • China’s Appetite for U.S. Farm Goods Target of USDA Mission
  • Palladium May Decline on ‘Trend Momentum’: Technical Analysis
  • Texas Tops Finds From Brazil to Bakken as Best Prospect: Energy
  • Oil May Fall on Lower U.S. Demand, Saudi Capacity, Survey Shows
  • Copper Bear Streak Extends as Output Falls
  • Cargill Says Gavilon May Likely Be Acquired by ‘New Player’
  • Country-Best Rally Spurs Minerva’s Market Return: Brazil Credit
  • Resource Firms Lead Surge in Convertible Issuance: Canada Credit 










SPAIN – the Spanish IBEX continues to flag negative divergences vs most major markets of the world (down -2% YTD vs Russia +20%) and Spain’s bond yields continue to move up into the right. German Finance Minister on Spain and Italy yesterday: “they are too big to save”… alrighty then.






JAPAN – currencies lead bonds, then currencies/bonds lead stocks – that’s what happened into the European Sovereign Debt Crisis and we don’t know why that would change in Japan. The Yen looks awful and finally the Nikkei broke an important line of immediate-term support (10,065) last night.










The Hedgeye Macro Team


NKE: Eight Bucks

No changes to our view. We love the unrealized earnings power here and are putting our model where our mouth is. But it’s important to be mindful of duration.


The quarter was outstanding. We thought they’d beat the consensus by better than a dime. The headline print was $0.03 better however the tax rate was higher than expected, which muted EPS by about $0.06. We can’t really call that ‘non-recurring’ because the fact of the matter is that with the US business en fuego, Nike is earning a greater proportion of its profits in higher tax jurisdictions. But operationally, Nike crushed it.


Relative to our expectations, revenue and SG&A both came in better, while Gross Margins missed. The latter came as an initial shock to us. Clearly, input costs are still an issue, and the company has too much apparel inventory in China and Europe. On the flip side we saw futures ACCELERATE on every basis you want to analyze…1 yr, 2 yr, C$, R$. Of note is the North America futures number – which was +22%. Now…let’s put this into perspective. This is an $8bn business. If we assume that 85% of this business is on the futures program, then we’re talking about $1.5bn in annual revenue. That's like adding an UnderArmour, a New Balance, an Asics, a Skechers and a couple of Crocs.


By our math, the NFL deal, which flips from adibok to Nike in early April, will probably be around $200-$300mm in year 1. That’s the lower end of where Reebok had it. That’s also why we think Nike will double this rate in year 2. And likely grow it by 50% in year 3. If this is the case in year 1, then let’s say $200mm of it is set for delivery within Nike’s current futures window. Assuming that 85% of Nike’s US business is on the futures program, that suggests that the NFL deal helped futures by about 5%. So…22% minus 5% = 17% growth in North American futures. For what it’s worth, we have to look back to the Clinton Administration to find the last time the North American business grew at this pace – and back then the company was stuffing the channel with apparel product and was STILL half the size it is today.


Obviously, we did not like the Gross Margin pressure. It’s uncharacteristic for Nike to miss on the Gross Margin line given that it has such great visibility into its supply and demand as far as six months out. Could it be that the inventory clip on margins is just hitting them harder than they’re admitting? Or could it be that the cost environment is simply not deflating like the entire world in global retail seems to think? Maybe it’s a little of both. But if any of it has to do with lack of realized cost deflation, then there’s going to a big wake up call for others in the industry that don’t have the same kind of control over their supply chain (which is somewhere between 98-99% of retail).


We’re tweaking our estimates – and we mean tweaking. We’re still looking for earnings in 2014 starting with an $8. The Street is at $6.75. 


NKE: Eight Bucks - NKE SIGMA


Here's a link to Monday's preview headed into the quarter - "NKE: 3 Peat".


Brian P. McGough
Managing Director




URBN: A Winner In 2012

Keith added Urban Outfitters to the Hedgeye Virtual Portfolio today. This is a name we’ve watched for the better part of the past year while it was a lightning rod of the hedge fund community. But we think that the setup for the stock is turning favorable across multiple durations.


TAIL (3 years or less): 

This is one of the few companies that can put up double digit square footage growth over the course of our 5-year model – and likely beyond. It’s not married to one concept that will simply max out growth when it runs out of malls – like what we saw at brands like Gap, American Eagle and Ann Taylor. We don’t think that its two major brands – Urban Outfitters and Anthropologie – are broken. They had fashion problems over the past year, which we think stem from poor execution by management. Fashion is a tough business, but when the right buying infrastructure is in place, there shouldn’t be a whole lot of risk for a company that sells third party brands.  Rather, URBN got sloppy in both product selection, quality and even PR. It lost sight of who its customer is, and merchandised accordingly. Yes, there is a customer ‘piss off’ factor that hurts for a time. But ultimately if URBN has the right organization in place, it will have the right product, which it will then sell to the right customer.


The good news from our perspective is that a merchandising issue like this for a vertically integrated company often takes 1.5-2-years to fix. But for URBN, we can see results much sooner. We saw CEO Glen Senk ‘step down’ in early January, and we saw founder Richard Hayne – who is extremely well liked and respected by the organization -  stepping back in totake control. Ted Marlow is also back heading the Urban Outfitters brand, after leaving when Senk was chosen for the CEO role.


Bears on this name say that this will never be the URBN of old. We could care less. It does not need to be the URBN of old to work from here. Recouping only half of its margin erosion of the past two years gets us to 12x earnings and 6x EBITDA based on today’s price. We’ll take that any day.


TREND (3 months or more):

While we’re not looking for an immediate turnaround, we should start to see tangible results within two quarters. Starting with the April quarter, revenue compares at both Anthro and Urban get increasingly easy. More notably, its inventories are exceptionally clean. The company’s move in our SIGMA analysis is unlike most other companies in retail (see below). Given our concern about 2H margins for the space in aggregate, we think that URBN will buck the trend in every direction. Better working capital and capex driving better margins simultaneously with better execution and sales.


TRADE (3 weeks or less):

The stock has stopped going down on bad news, the short interest as a percent of float is high at 12%, and 53% of sell side ratings are NOT Buy. Near-term risk management levels on Keith’s models are :


TRADE = 28.15

TREND = 27.05


He’ll be managing risk around near-term positioning from a PM vantage point. Looking longer out, you’re going to see us get louder on this one. We think it could be a LIZ-like winner in 2012.


URBN: A Winner In 2012 - URBN SIGMA


URBN: A Winner In 2012 - URBN levels

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%