TODAY’S S&P 500 SET-UP – May 18, 2012

As we look at today’s set up for the S&P 500, the range is 41 points or -0.14% downside to 1303 and 3.00% upside to 1344. 












  • ADVANCE/DECLINE LINE: on 5/17 NYSE -2242
    • Down from the prior day’s trading of -1037
  • VOLUME: on 5/17 NYSE 945.14
    • Increase versus prior day’s trading of 8.33%
  • VIX:  as of 5/17 was at 24.49
    • Increase versus most recent day’s trading of 9.97%
    • Year-to-date increase of 4.66%
  • SPX PUT/CALL RATIO: as of 05/17 closed at 2.30
    • Down from the day prior at 2.34 


  • TED SPREAD: as of this morning 37
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.73
    • Increase from prior day’s trading at 1.70
  • YIELD CURVE: as of this morning 1.43
    • Up from prior day’s trading at 1.40 

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: Fed to purchase $4.5b-$5.25b notes in 8/15/2020 to 5/15/2022 range
  • Baker Hughes rig count, 1pm 


  • President Obama welcomes leaders of Germany, Japan, other nations for two days of meetings at Camp David, Md.
  • Obama meets with newly elected French President Francois Hollande at the White House, TBA
  • Obama speaks at Chicago Council on Global Affairs agriculture event, 10:15am
  • House in session:
    • Senate not in session
    • House Financial Svcs. panel holds hearing on heightened capital requirements under Dodd-Frank, 9:30am
    • CFTC holds closed meeting on enforcement matters, 10am 


  • Facebook raises $16b in record technology offering, sold 421.2m shrs at $38 each; set to begin trading at 11am
  • Facebook underwriters said to split ~$176m in fees
  • JPMorgan may lose $5b on derivative trades: WSJ
  • Santander, BBVA among Spanish banks downgraded by Moody’s
  • Greece’s credit rating downgraded 1 level by Fitch
  • Tsipras tells the WSJ he sees little chance EU stops funding for Greece, but if it does, country would have to stop paying creditors
  • Warren Buffett said to have pursued ResCap purchase before bankruptcy
  • American Airlines merger with US Airways is inevitable, a union expert says
  • China home prices fell in a record number of cities last month, car dealers posted inventory levels that foreshadowed deeper price cuts
  • Obama meets today for the 1st time with new French president Francois Hollande ahead of G-8 summit
  • No IPOs expected to price today
  • NATO Summit, China, JPMorgan, Formula 1: Week Ahead May 19-26 


    • Hibbett Sports (HIBB) 6:30am, $0.92
    • Donaldson (DCI) 7am, $0.43
    • Foot Locker (FL) Pre-mkt, $0.74
    • ANN (ANN) 8am, $0.89
    • Raven Industries (RAVN) 9:10am $0.89 



OIL – get the US Dollar right, you’ll get everything else big beta right. We’ve been making this call (Deflating The Inflation) since March and now you’re seeing Oil (Brent in particular) capitulate on the downside (Brent $106.79 = down -15% in a straight line w/ the USD having a record 12 consecutive up day move). Major perf problems in the commodity hedge fund business.

  • Corn Traders Most Bullish Since March on U.S. Heat: Commodities
  • Gold Advances a Second Day as Europe Debt Concern Boosts Demand
  • Oil Heads for Weekly Loss on Debt Crisis; Brent Spread Narrows
  • Japan Aluminum Buyers Said to Face Highest Premiums Since 1996
  • Copper Narrows Third Weekly Drop on Speculation About a Rebound
  • Wheat Seen Declining as Harvest in U.S. May Increase Supplies
  • Robusta Coffee Climbs as Vietnamese Beans Reach Seven-Month High
  • U.S. Farmers Union Demands 30-Day Review of CME Trading Plan
  • YPF Bonds Sink as Buyback Called Into Doubt: Argentina Credit
  • Seaborne Trade in Coal is Seen by SSY Expanding 6.7% This Year
  • Chesapeake Turns to Jefferies’ Eads in $28 Billion Deals: Energy
  • Hong Kong Bourse Should Lose Monopoly If It Wins LME, Rival Says
  • LNG Peak Seen as Mideast Return Meets Japan Need: Energy Markets
  • Corn Traders Bullish on U.S. Heat Concern
  • Soybean Trendline Signals Rally Near Record: Technical Analysis 









EUROPE – it’s a race to the bottom now between the biggest Petro-Dollar equity market in the world (Russia) and Spain – both are crashing obviously, and both are down -26% since March. We have immediate-term TRADE oversold signals in pretty much everything that ticks in Europe (other than Greece and Hungary), including the EUR/USD.






JAPAN – Japanese Equities hammered again last night (down another -3% making it a -16% draw-down from the down Yen is good for Exports thing?); we still think that the sovereign debt and fiscal crisis in Japan will be consensus news by year-end.










The Hedgeye Macro Team

It's Done

“I never see what has been done; I only see what remains to be done.”



I’ll have to differ with Buddha on the first part of that thought this morning. I can definitely see what has been done out there. After a -8.1% swan dive in the SP500 (-10.9% in the Russell) and a +71% rip in the VIX since the perma-bull March top, It’s Done.


Done. As in way oversold in the immediate-term done.


Back to the Global Macro Grind


We understand, fundamentally, why Asian, European, and US stocks have been going down since February-March. We understand, mathematically, why Commodity prices (and the Equities that track them) have been annihilated.

  1. #GrowthSlowing
  2. #DeflatingTheInflation
  3. #BernankeBubbles

Instead of banging your head against the wall trying to trade Facebook this morning, call up those hash tags on Twitter, and you’ll see that we’ve been leading on these topics for at least 3 months.


Way too many people confused Ben Bernanke’s January 25thPolicy To Inflate (commodities and stocks) as growth. Short-term pops in asset price inflation is not growth. It’s precisely that food and energy price inflation that perpetuated Growth Slowing.


If you get the Slope of Growth right, you’ll get a lot of other things right. If you get the slope (sequential direction) of both Growth and the US Dollar right, at the same time, you’re done.


Done as in, done selling high – going to Cash, done.


You can have the best bottom-up “ideas” in the world, but when The Correlation Risk goes to 1.0, that’s when almost everything you are long is done too. Done, as in the bad kind of done.


As of last night’s closing prices, here’s the immediate-term TRADE correlation between the big stuff and the US Dollar Index:

  1. SP500 = -0.98
  2. Euro Stoxx600 Index = -0.99
  3. CRB Commodities Index = -0.94

There is no “de-coupling.” There is no risk management in the broken sources who have led you over these cliffs in Q1 2008, 2010, 2011 … and now, again in 2012, either. “Again!” (Herb Brooks)


How many times do we have to allow our profession’s consensus brain-trust miss plainly obvious forecasts of rain while the macro data was soaking wet?


The short answer is that they are done too. The People don’t trust the Old Wall anymore. And they shouldn’t. It’s going to take a long time before we, as a profession, earn The People’s trust (and inflows into Equities) back.


On a cheerier note, this morning I’ll open with our lowest Cash (64%) and highest Equity (36%) positions in the Hedgeye Asset Allocation Model since January (over the course of the Growth Slowing cycle, we’ve moved from 0% US Equities to 24%, and maintained a 0% allocation to Commodities).


To be crystal clear on duration, I’m playing this for the bounce. When markets are viciously oversold like this on our immediate-term TRADE duration, that’s just what we do. It’s no different than when I was shorting the SP500 in March-April at immediate-term TRADE overbought signals. We aren’t perma anything. Risk works both ways. The risk now is to the upside.


Looking at immediate-term ranges in the LONG positions in the Hedgeye Portfolio, here’s where I stand in terms of immediate-term upside/downside in all 14 of our current positions:

  1. SP500 (SPY) = 1
  2. Consumer Discretionary (XLY) = $42.29-43.74
  3. US Healthcare (XLV) = $36.32-37.07
  4. Apple (AAPL) = $528-560
  5. China (CAF) = $19.41-20.44
  6. Brazil (EWZ) = 50.77-55.34
  7. Melco (MPEL) = 11.84-13.33
  8. Nike (NKE) = $104.14-107.79
  9. Lifepoint (LPNT) = $34.93-36.66
  10. Hologic (HOLX) = 16.81-17.71
  11. HCA Holdgings (HCA) = $25.21-26.19
  12. Urban Outfitters (URBN) = $25.46-27.26
  13. Liz Claiborne (FNP) = 11.78-13.11
  14. Starbucks (SBUX) = 51.63-56.14

It’s Done. I bought a handful of these positions in the last 2-days. #TimeStamped like any position you have taken. I don’t run from them at the lows. I buy them on red. All the while I’m trying to understand each and every factor of each position with my Research Team so that we can handicap the probability of where prices move within our ranges, across durations.


These ranges are immediate-term TRADE durations. From an intermediate-term (TREND) to long-term (TAIL) perspective, our models generate wider ranges of risk.


Generating good “ideas” is what every good research team in this business should be doing – both long and short. But having great performance on those ideas is highly dependent on getting the timing right. You’ll need a repeatable risk management process for that.


Our Research Team, led by our Director of Research, Daryl Jones, has just published their work on Facebook. If you’d like a copy, please email . We won’t have a risk managed view of the stock until it opens and starts giving us price, volume, and volatility data.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1, $106.78-111.52, $80.49-81.84, $1.26-1.28, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


It's Done - Chart of the Day


It's Done - Virtual Portfolio

Early Look

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NKE: Buying More, Confidence High

Keith bought more NKE in the Hedgeye Virtual Portfolio on this morning's beta capitulation/selloff- NKE remains one name in consumer discretionary where we remain confident that the company is executing, and that numbers are low -- despite European contagion.



NKE: Buying More, Confidence High - NKE TTT

GPS: 1Q12 Report Card

Conclusion: There is only one issue that matters here...and that's the trade off between operational execution and financial engineering. The latter is easy, but when you run out of net cash -- like GPS is doing -- execution is critical. We won't hang our hat there. 



Before we get all excited about the GPS quarter (they were 'Congratulated' half a dozen times in the Q&A), lets consider the following. Yes, sales were up 6%.That's great for a company that has comped down for the better part of 4 US Presidential Terms. But a) it faced an easy compare vs last year, b) weather helped, c) the Easter shift was a factor, and what no one is talking about, d) JC Penney just printed a 21% decline in sales. If GPS garnered only 1/10th of that, it helped comps by over 2%.


But here's our favorite stat. Depite the boost in sales, net income was flat. But EPS was up 18%. Share count vs last year? Down 18%.


Make no mistake, this has been a financial engineering story over the past 8-years. $11bn in repo has taken down the share count by 47%. As recently as 3-years ago, GPS was sitting on a net bash position of $2.3bn. Now it is down to $400mm. In other words, this did not need to be an operational improvement story to grow earnings. Now the share repo angle is largely over. GPS absolutely NEEDS to show consistent comp and/or margin improvement.


Does it have the next quarter or two in the bag? Probably. It goes up against two very easy quarters, and JCP will continue to hemorrhage share for at least a few quarters. But GPS has already conceded that it will reinvest some of its Avg Unit Cost savings back into price and product in 2H. We think that it will have to invest much more than it plans.


We don't like this one.




GPS: 1Q12 Report Card  - GPS S


Outlook: In order to properly measure performance relative to original expectations, we look at management’s first quarter results relative to management guidance as well as any updates to previously provided full year 2013 outlook:


GPS: 1Q12 Report Card  - GPS Outlook


Highlights from the Call:

Domestic strength across all three concepts

In the process of making product corrections first highlighted back in Feb

Online up +18%  - investing in online media, mobile tech, etc.

Believe they have a competitive advantage in online - gaining share


Growth initiatives:

Franchise business added 3 new markets & 22 new stores

China added 7 new stores - on track for 30+

Athleta on track to add 25 stores



Old Navy - redesigned t-shirt business in Q1

Gap - color bottoms and color denim big driver in Q1


Marketing Investments:

Five new creative platforms

Gap - Be Right received well

BR - work good execution through direct mail


New Hire: Stephan (from H&M) to run Old Navy

Joining in October

Global experience - key for expanding Old Navy's success domestically

Sales +6% on comps up +4%

Higher AUC

Margins down only -15bps

New stores and franchise business accounted for 2pt spread


GM: -15pbs

AUR up

Merchandise margin down 150bps driven by higher unit cost

Occupancy costs leveraged 130bps (cautioned against extrapolating this level of leverage due to timing of openings etc)

Inventory: Inventory /store -7%



Up $62mm to $980mm due to marketing spend and store payroll

Marketing up $20mm to $139mm



CapEx = $148mm (net sq. ft. down -2%)

FCF = $216mm vs 104 yy

Cash $2Bn

SRA = $1Bn (Minimal repo in Q1)




Weather was very favorable in Q1

Includes 53rd week

Modest top-line growth

Healthy merchandise margin

Expect AUC to improve yy in 2H

Saving to be offest in part by reinvestment in product

Expect leverage on positive comps

Will be investing more in domestic growth initiatives - don't expect operating leverage this year

Marketing investment step up to be similar in Q2 to Q1 = ~$20mm

With over 200mm shares repo'd in 2010-2011 at avg price of $19.60 comfortable with slower pace in 2012



Product Costs vs. Outlook:

  1. Feel good about AUC in 2H; It’s the AUR piece that will have to 'play out' as the year goes on
  2. Expect to cont. to increase store payroll and investment
  3. Minimal share repo will impact how EPS modeled

Avg. Unit Costs:

  • Entire 2H up 20% including holiday
  • Reinvesting some of those costs coming off into categories like suiting at BR, Denim at Gap
  • More Gap Fit (i.e.  athletic pants) are higher AUC than panties so less favorable mix shift
  • Re units, as pressure on AUC eases - pulled back most units on Old Navy given AUC increases so plan to increase units this year as costs subside

Concept Callouts:

  • Happy with new Gap Fit business
  • Kids and baby business very strong - broad based strength at Gap
  • At Old Navy new t-shirt initiative - wish they had more colored bottoms

Uses of Cash:

  • Share repurchase has been 'lumpy - wouldn't read too much into it'
  • Quick move in stock so program didn't keep pace / catch up


  • Were up +10% last yr, down -7% in Q1
  • A little lean in Old Navy headed into Q2

Marketing Spend:

  • Seeing increased traffic and sell-through at Gap
  • Ramping direct mail effort and online at BR
  • More marketing behind Gap brand to showcase product (athletic fit & t-shirts)
  • Expect a step up in traffic from spend

Operating Expense:

  • Store growth will increase absolute rent investment
  • Plan to make investments this year in the domestic business
  • In 2008-2011 the expense base has stayed relatively flat despite int'l expansion
  • Now that they are seeing product assortment improvements, they want to propel those initiatives

Old Navy:

  • Final changes to value proposition will be in place by end of May = sharper pricing, assortments
  • Merchandising and store team element key to success from June on when chgs should be reflected

Competitive Share Gain:

  • Old Navy is not JCP's #1 competitor
  • Sure everyone in value business got a little piece


  • Productivity /ft is very impressive
  • Team has brought a leading operating example to Gap Inc.

International - Old Navy Expansion:

  • Japan had a +13% sales increase in the quarter
  • China committed to 30 stores - did 7 in Q1
  • Franchise business up 30%+
  • Modeling after successful global model for Japan intro - push model, very little localization

Customer Demo:

  • Opportunity for more customer in the mid 20s-30s
  • Brand hasn't been as relevant to them in recent years
  • New marketing pulling in broader consumer set

Piperlime Transition to Physical Store Model:

  • Taking blue print from Athleta
  • Have a central design team for the stores to bring the brand to light

Product & Price:

  • 2011 didn’t stay true to value proposition that they offered in 2010, they just have to get back there - 'tweak it'

Operating Margin Cadence:

  • More spend in 2H?
  • No real chg to view
  • Expect some top-line and margin expansion in 2H as deleverage expenses

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 80.43%
  • SHORT SIGNALS 78.34%