“Once you understand the main conclusion, it seems it was always obvious.”
Obviously, after the SP500 is down for 3 consecutive days, Asian stocks have their worst week of the year, and the Japanese Yen drops 9% in a straight line, Global Growth Slowing matters – right? Right. Right. Everyone nailed it, again.
The aforementioned quote comes from the end of Chapter 22 in “Thinking, Fast and Slow” titled Expert Intuition: When Can We Trust It? Obviously, after seeing Sell-Side and Washington consensus miss the Growth Slowdowns in Q1 of 2008, 2010, 2011, and now 2012, the conclusion is that you cannot trust our profession’s broken “economic” sources.
“When evaluating expert intuitions you should always consider whether there was an adequate opportunity to learn the cues, even in a regular environment” (Kahneman, page 243). The globally interconnected cues associated with inflation slowing global growth have been as obvious as obvious gets.
Back to the Global Macro Grind…
Let’s check in with the “experts” this morning:
1. Credit Suisse – last week they said that “bond yields could rise further – this might help Equities” … so we’re still waiting to hear from them as to whether US bond yields falling this week might not help equities.
2. Goldman Sachs – their currency strategist, Tom Stolper (who has been on the opposite side of just about every big currency call we’ve made for the last few years) says buy the Japanese Yen and sell the US Dollar. We’re still on the other side.
3. Ben Bernanke – says “consumer spending has not recovered, it’s still quite weak relative to where it was before the crisis” and he is effectively daring consumers to draw down their savings even more to “fuel spending growth.”
You’ve just got to love how central planners think. Hey, why don’t we jam the entire world with Policies To Inflate, then chastise people for not having enough real (inflation adjusted) money left to buy things.
The good news is that some experts still have some credibility. Some of them actually still believe in gravity. German Finance Minister official, Ludger Schuknecht, said yesterday that Italy and Spain are “too big to be saved.”
Spain looks awful, fyi.
Away from the Obvious Conclusion that stocks can in fact go down after they go straight up, it’s a fairly quiet morning here in New Haven, CT. That’s interesting, given that yesterday was actually the 2nd biggest down day for the SP500 of 2012. It was only down -0.7%!
That’s not normal. Neither are the US stock market’s volumes – they are dead as the trust embedded in America’s craw.
Looking at the 3 biggest SP500 down days of 2012:
- March 6th= down -1.5%
- March 22nd= down -0.7%
- Feb 10th= down -0.6%
Since they seem to have a completely arbitrary “year-end target” for just about everything else, ask your local expert at an Old Wall Street shop how many days we’ll have this year where the market closes down by more than 1%. Here’s my expert forecast – more than one.
Remember, as Growth Slows, intermediate-term tops are processes, not points. Here are the last 3 times we’ve shorted what we call immediate-term TRADE overbought tops in the SP500:
- February 15th= covered Short SPY for a +0.94% gain
- February 22nd= covered Short SPY for a +0.21% gain
- Current short position = +0.52% in our favor (unrealized)
Obvious Conclusion: slim pickings for those of us who like to pick off price momentum chasing. That said, this was equally obvious in Feb-April of 2011. Then, tick-ah-tee-boom! The expert perma-bulls got run-over, again.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Japanese Yen (USD/JPY), and the SP500 are now $1, $122.37-124.57, $79.33-80.45, $82.22-84.14, and 1, respectively.
Best of luck out there today and enjoy your weekend,
Keith R. McCullough
Chief Executive Officer
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.
SECTOR AND GLOBAL PERFORMANCE
- 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%)
CREDIT/ECONOMIC MARKET LOOK:
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
WHAT TO WATCH:
- 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
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- 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
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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.
Here's a link to Monday's preview headed into the quarter - "NKE: 3 Peat".
Brian P. McGough
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