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TODAY’S S&P 500 SET-UP – May 22, 2012

As we look at today’s set up for the S&P 500, the range is 42 points or -2.13% downside to 1288 and 1.06% upside to 1330. 












    • Up from the prior day’s trading of -1586
  • VOLUME: on 5/21 NYSE 798.10
    • Decrease versus prior day’s trading of -31.32%
  • VIX:  as of 5/21 was at 22.01
    • Decrease versus most recent day’s trading of -12.31%
    • Year-to-date decrease of -5.94%
  • SPX PUT/CALL RATIO: as of 05/21 closed at 1.58
    • Down from the day prior at 2.08 


  • TED SPREAD: as of this morning 39
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.76
    • Increase from prior day’s trading at 1.74
  • YIELD CURVE: as of this morning 1.47
    • Up from prior day’s trading at 1.46

MACRO DATA POINTS (Bloomberg Estimates):

  • 6:15am: Atlanta Fed President Lockhart talks in Hong Kong
  • 7:45am/8:55am: ICSC/Redbook retail sales
  • 10am: Richmond Fed, May, est. 11 (prior 14)
  • 10am: Existing Home Sales, Apr., est. 4.62m (prior 4.48m)
  • 10am: Existing Home Sales (M/m), Apr., est. 3.0% (prior -2.6%)
  • 11:30am: U.S. to sell 4-week bills
  • 1pm: U.S. to sell $35b 2-yr notes
  • 4:30pm: API inventories 


    • Republican presidential primaries in Arkansas, Kentucky
    • Senate in session, House meets in pro forma session, 10am
    • Senate Banking holds a hearing on derivatives rules required by Dodd-Frank; CFTC Chairman Gary Gensler, SEC Chairman Mary Schapiro will testify
    • Treasury Secretary Tim Geithner attends Financial Stability
    • Oversight Council mtg
    • Interior Secretary Ken Salazar, Bureau of Safety and
    • Environmental Enforcement Chief Jim Watson conduct forum on oil-well blowout preventers, federal oversight, 8am
    • NRC advisory panel subcommittee on Fukushima meets to review guidance documents on task force recommendations, 8:30am
    • FDIC Acting Chairman Martin Gruenberg speaks at American
    • Securitization Forum’s annual meeting, 9am


  • OECD said Europe’s debt crisis risks spiraling, damaging world economy; cuts 2012 euro-area GDP forecast to -0.1% from 0.2%
  • Facebook fell 11% to $34.03 in 2nd day of trading
  • U.S. antitrust regulators told EBay, Yelp to provide information on whether Google is competing unfairly, speeding up a probe that began a year ago, people familiar said
  • Accor agreed to sell Motel 6 hotel chain to Blackstone- managed fund for $1.9b
  • Fitch cuts Japan L-T ratings to A+; outlook negative
  • U.S. sales of existing homes probably rose in April for 1st time in 3 months to 4.61m annual rate
  • CFTC to release clearing proposal for index swaps, Gensler says
  • Merkel, Hollande head for showdown on debt at EU summit
  • U.K. inflation slowed more than economists forecast in April
  • IMF says U.K. needs more monetary stimulus, possible tax cuts
  • Former Yahoo! executive, former mutual fund manager at a unit of Ameriprise pleaded guilty to insider trading, the U.S. said
  • MetLife seen scaling back annuities as CEO Kandarian unveils his plan to improve returns
  • Spain borrowing costs rise at 6-month bill auction
  • KKR said to be close to raising $2b for second Asia fund
  • IAEA, Iran reach agreement on atomic inspections
  • No IPOs expected to price today 


    • Williams-Sonoma (WSM) 6am, $0.32
    • Express (EXPR) 7am, $0.49
    • AutoZone (AZO) 7am, $6.25
    • DSW (DSW) 7am, $0.90
    • Cracker Barrel Old Country Store (CBRL) 7am, $0.75
    • Medtronic (MDT) 7:15am, $0.98
    • Best Buy (BBY) 8am, $0.59
    • Ralph Lauren (RL) 8am, $0.85
    • Collective Brands (PSS) 4pm, $0.44
    • Analog Devices (ADI) 4pm, $0.51
    • Universal (UVV) 4pm, NA
    • Dell (DELL) 4:01pm, $0.46
    • PetSmart (PETM) 4:02pm, $0.73
    • Guess? (GES) 4:04pm, $0.26
    • Take-Two Interactive Software (TTWO) 4:05pm, $(0.54)
    • Avago Technologies (AVGO) 4:05pm, $0.63
    • Compuware (CPWR) 4:13pm, $0.14
    • HEICO (HEI) 4:30pm, $0.37
    • Qihoo 360 (QIHU) 5pm $0.15 


  • Diamond-Seller Choksi Takes on World With Bollywood: Commodities
  • Wheat Falls as Rain in Russia and Ukraine May Aid Parched Crops
  • Oil Drops as OECD Cuts Europe Growth, Iran Agrees to Inspection
  • Gold Declines as Rally Prompts Sales and Physical Demand Falls
  • Copper Falls 0.5% in New York Trading, Declines 0.2% in London
  • Palm Oil Climbs for Fourth Day as 10% Drop Lures Investor Demand
  • Robusta Coffee Falls in London on Speculation Price Rose Too Far
  • U.S. Said to Oppose Easing Oil Sanctions at Iran Nuclear Talks
  • Oil Supplies Grow as Seaway Relief Valve Looms: Energy Markets
  • GrainCorp Climbs After Raising Full-Year Forecast to Record
  • Cotton May Drop 23% by Year-End on Inventories: Chart of the Day
  • Flint Hills Has Release at Corpus Christi Plant, NRC Filing Says
  • BHP ‘Chopping Block’ Looms for Nickel, Aluminum Assets Amid Cuts
  • Ships Deter Pirate Stalkers by Signaling Armed Guards’ Presence
  • Indonesia May Cut June Palm Oil Export Tax to 18%: Association
  • Brazil Set to Lose Out as Thailand Meets Chinese Sugar Demand 





US DOLLAR – we bought back our bullish position in the US Dollar on red yesterday and still think it offers the most asymmetry to the upside of almost any big Global Macro trade; the fallout, if we continue to be right on that, will be in the Commodities – we re-shorted Gold yesterday as its immediate-term correlation to the USD is -0.89.











JAPAN – our bearish call on Japan is starting to pick up a broader audience (launched it in March); Fitch downgrades Japan to A+ this morning for some of the wrong reasons, but who actually reads what they say anyway? bottom line is that Japan has huge fiscal/debt issues; we re-shorted Yen on Friday and that’s reacting negatively on the Fitch headline, down -0.54% (vs USD).


INDIA – nope, it’s not all about Greece/Europe folks – India’s stock market stopped going up in February and now their fiat currency is in freefall (Rupee); Sensex failed at its 1st line of (16341) resistance last night and is down -12% from its Feb top. India is not China.










The Hedgeye Macro Team

CHART OF THE DAY: Prospects of Survival


CHART OF THE DAY: Prospects of Survival - Chart of the Day

Prospects of Survival

“Organisms that treat threats as more urgent than opportunities have a better chance to survive.”

-Daniel Kahneman


If you only have time to read one chapter of Dan Kahneman’s Thinking, Fast and Slow this summer, I’d go with Chapter 26, Prospect Theory. It helped me bridge some gaps between the fractal dimensions in our models (math) and behavorial factors.


Prospect Theory is a behavioral economic framework that will be much more relevant to the next generation of economists than this one. It will take time to pound the Keynesianism out of our system. Sadly, seeing centrally planned economic systems in Europe and Japan (maybe at some point in the USA) fail, will be the only way to expedite this evolution.


On pages 282-283 of Kahneman’s latest book, you’ll get Prospect Theory both with a simple picture and three bullet points of prose:


1.       “Evaluation is relative to a neutral reference point.”

2.       “A principle of diminishing sensitivity applies to both sensory dimensions and the evaluation of changes in wealth.”

3.       “The third principle is loss aversion… losses loom larger than gains.”


And that brings me right back to the top of this morning’s Early Look quote, to the bottom of your gut feeling at Friday’s lows, and back again to yesterday’s biggest market rip in 2 months. Your Prospects of Survival in this business depend on your process.


Back to the Global Macro Grind


Losing other people’s money isn’t cool. Losing your own money is even less cool. If you are doing both at the same time, my sense about the matter doesn’t really matter – where your emotions fit on the slope of the loss aversion curve does.


That’s why we bought red on Friday and sold green into yesterday’s close. When it comes to your decisions to buy or sell something, there really are no rules about reversing everything you did in the prior day. I am not Warren Buffett. I am your Risk Manager. The only rules in our profession are self imposed by the institutions who think they are managing our risk.


But what is risk? What are these institutional investing styles? Why are either measures relevant to what’s happening in your portfolio today as opposed to risk measurements and style factors you may have used in 2005-2007?


There are many more questions here than answers. My goal, at the top of every risk management morning, is to Embrace Uncertainty and have markets pick me. The more I try to pick markets, the more risk I impose on myself. What is supposed to work, rarely works. And what shouldn’t happen, usually happens. Either accept that, or whine about it – it’s reality.


I sold my SP500 (SPY) long position yesterday – here’s why:

  1. Immediate-term TRADE upside resistance into the close = 1329 (so I only had 1% upside left)
  2. Immediate-term TRADE downside support into the close = 1288 (2% downside makes my risk vs reward 2:1)
  3. Immediate-term RANGE of risk (3 day probability model) = 89 S&P points (that means volatility will be real)
  4. US Equity Volatility (VIX) was down -12.3% on the day but holding my TRADE and TREND lines of support
  5. US Equity Volume was down -17% versus the average volume of last week’s down days
  6. US Equity Correlation Risk to the US Dollar Index remains wacky elevated at -0.96 (USD vs SPY)

Multi-factor, Multi-duration Risk Management – that’s how I roll. On the immediate-term TRADE duration (3 weeks or less), those were the 6 glaringly obvious reasons to be at least a lot less net long. Catalyst wise, I gave you my calendar ones in yesterday’s note.


In the Hedgeye Portfolio, we opened the day with 16 LONGS, 4 SHORTS and closed the day with 10 LONGS, 8 SHORTS. That’s easily the most aggressive 1-day swing in what can be considered a proxy for my “net” exposure in 2012.


But was it aggressive? Or wasn’t it aggressive enough? Maybe I should have sold everything and gone to 100% Cash. Maybe I should have shifted to net short. Maybe I shouldn’t have done anything at all.


Maybe I should just stick with the process and take the high probability cut at the ball, and live with it.


And I will.


With the US Dollar Index down for the 2ndday in a row, we bought that long position back yesterday on red. That position is one we have been pounding the pavement on with clients as the most asymmetric long-term long idea in Global Macro (email for Theme #3 in our Q2 Macro Themes called “Asymmetric Risks” and you’ll see the long-term mean reversion case for Strong Dollar).


In addition to the aforementioned Correlation Risk of staying long the SP500 (SPY) in the face of a -0.96 USD/SPY correlation this morning, here’s a refresh of the other big immediate-term USD correlations jumping off the page:

  1. Commodities (CRB Index) = -0.92
  2. Euro Stoxx600 = -0.97
  3. Gold = -0.89

That’s why I re-shorted Gold (GLD) yesterday too.


There’s rain in Connecticut, but Prospects of Survival out there this morning look better than bad.


My immediate-term support and resistance ranges for Gold, Oil (WTIC), US Dollar, EUR/USD, and the SP500 are now $1, $90.57-94.12, $80.82-81.97, $1.26-1.28, and 1, respectively.


Best of luck out there today,




Keith R. McCullough
Chief Executive Officer


Prospects of Survival - Chart of the Day


Prospects of Survival - Virtual Portfolio

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President Obama’s Reelection Chances Dip to Their Lowest Level in Three Months


President Obama’s odds of winning reelection slipped to 56.5%, according to the Hedgeye Election IndicatorDaryl Jones (HEI). That’s the lowest reading on the HEI since early February, and it marks the fourth consecutive weekly decline. The HEI measures the likelihood that President Obama would win reelection if the election were held today.



President Obama’s Reelection Chances Dip to Their Lowest Level in Three Months - HEI



Hedgeye developed the HEI to understand the relationship between key market and economic data and the US Presidential Election. After rigorous back testing, Hedgeye has determined that there are a short list of real time market-based indicators, that move ahead of President Obama’s position in conventional polls or other measures of sentiment.


Two of those indicators, the relative strength of the US dollar versus a basket of international currencies and the weak overall performance of the US stock market, contributed to President Obama’s weaker chances to win reelection, according to the HEI.


Based on our analysis, market prices will adjust in real-time ahead of economic conditions, which will ultimately shape voters’ perception of the Obama Presidency, the Republican candidates and influence the probability of an Obama reelection.  


The model assumes that the Presidential election would be held today against any Republican candidate. Our model is indifferent toward who the Republican candidate is as the sentiment for Obama and for any Republican opponent is imputed in the market prices that determine the HEI. The HEI is based on a scale of 0 – 200, with 100 equating to a 50% probability that President Obama would win or lose if the election were held today.


Hedgeye releases the HEI every Tuesday at 7am ET until the election November 6.


URBN: Night and Day

Conclusion: There’s still wood to chop here, no doubt. But this is a sub $3bn company acting like a $10bn company. If we’re right, than URBN is trading at about 7.1x our next year EBITDA estimate. If you want to short that, knock yourself out. 


We think URBN is headed higher. We like this one across all three of our durations, TRADE, TREND, and TAIL. The tone and cadence of management’s approach this quarter makes this a tough story to build a negative case against – particularly in a space where we think we need companies with asymmetric factors on the long side in order to take them higher.


We went into the quarter thinking that URBN was one of the few names that had the luxury of a disproportionately favorable miss/beat balance (the market rewards a penny beat more than it penalizes a penny miss). Over the past six months URBN has had one of the most major management changes we’ve seen in a retailer relative to its size in a very long time. Our rather strong sense is that this team will be given a free pass to shake things up near-term, and that any upside (even if by accident) will be a bonus.


Let’s not bend any facts here. The quarter stunk. URBN took 8.6% sales growth and morphed it into a 10.1% EBIT decline. But relative to expectations, it was slightly better. One comped a comp (Urban), while the other (Anthro) comped down on the easiest compare of the year. There were definitely puts and takes. But the big take-away came from simply listening to this management team.


They sounded so extraordinarily focused – such a stark contrast to the URBN of six months ago. Seriously…go back and listen to the past two calls. Night and day. That’s what you get when you bring in the founders to save the day.


The message is simple.

  1. Hire all the right talent.
  2. Empower each of them to come up with a concise plan, to which they will be held accountable.
  3. Give them the financial and human resources to achieve the plan.


Along the way, they’ve got shared services initiatives (DC just going up for 3Q) that should allow URBN to leverage the back-end across concepts while investing in areas like mobile and digital to more efficiently flow product and reach new customers.


They don’t really give comp forecasts – which is great bc forecasting comps is ridiculous. They simply focus on the process to put up the numbers, and hold themselves accountable to execute. Anyone reading this knows that I (McGough) rarely throw out public kudos to management teams, but the bottom line is that listening to these guys is like listening to a company with $10bn in revenue, not $2.5bn.


There’s still wood to chop here, no doubt. But we’re coming up with estimates about 20% above consensus. If we’re right, then URBN is trading at about 7.1x our next year EBITDA estimate. If you want to short that, knock yourself out.


Brian McGough

Managing Director



URBN: Night and Day - URBN SIGMA


Highlights from the Call

 Revenues +9%

  • $34mm increase in net new stores sales (14 new stores)
  • 2% increase in Retail comps (incl. DTC)
  • Urban: +6% vs. +2.3E
    • Positive comps across all categories
  • Free People: +2% vs. +6.1E
    • Opened largest store to date with full floor of intimate apparel ("Intimately Free")
  • Anthropologie: -2% vs. +0.3E
    • Positive regular price comps in women's apparel
    • Catalog showed significant aesthetic improvement throughout the Q
  • Retail Store Segment Sales +7.5%
  • Comparable Store net sales (-1%)
    • Transactions (-1%)
    • Avg Units per Transaction (-2%)
    • Partially offset by AUR +2%
  • Terrain: Excellent Spring season from weather; opened 2nd store in Westport, CT
  • DTC net sales +15%
  • All brands posted healthy DTC growth
  • Wholesale +2%
    • 19% increase in Free people wholesale; 30% increase in sales to specialty accounts
    • Offset by transition of Leifsdottir to Anthropologie Brand


  • All of the UK stores were challenged
  • Urban stores in Germany tracking above sales plan
  • Urban/Anthro DTC Europe sales gains in excess of 30%

GM: (-131 bps)

  • Store occupancy deleverage related to increased store openings
  • Increase in new and non comparable European stores
  • Slightly higher markdowns on some women's categories across all brands

 SG&A +11% (+62bps as % of sales)

  • Primarily due to deleveraging of direct controllable expenses due to negative comps

 Inventories +13%

  • Increase in comparable retail inventories + 11% at cost, +5% in units
  • Total comp store inventories +8% at cost
  • Remaining due to acquisition of new store inventory and wholesale inventory


Dick Hayne CEO Goals:

  • Fill management roles with top talent- met quickly with a solid team of merchants leading the brands
  • Strategy to reignite top line growth - Emphasizing growth through 4 initiatives
  • Increase productivity in current channels through marketing, improved product and tech
  • Acquire more customers by expanding distribution channels- more robust presence in Europe and Asia
  • Expanding product offerings (i.e web exclusives, Free People intimates)
  • Acquire new concepts to compliment current brands- nothing currently in the pipeline but reviewing opportunities
    • Ensure Brand leaders have tools, talent, capital to succeed


Shared Services Initiatives:



  • Special focus on supporting e-commerce and international growth initiatives
  • Rolled out mobile POS to store last year- continue to expand number of devices
  • Capabilities will be expanded to fulfill store or online out of stock from any store in the US
  • Launching IPAD POS device later this year


  • Expect West coast fulfillment center to be open in 3Q13
  • Will substantially reduce delivery times to west coast customers
  • Will help reach service goal of US of 2 days or less


  • Focused on customer facing talent
  • Improving the scope of digital recruiting
  • Enhancing merchant development program



Outlook for the Remainder of the Year:



  • Weather may have been a pull forward of sales into Q1
  • Planning 14 stores in Q2
  • Gross Margin Rate (absolute rate of 35.6%) will be similar to Q1

Full Year

  • Sales exceeded conservative plans but benefitted from favorable weather in March- full year plans unchanged
  • 55-60 stores 
    • 21 URBN
    • 16 Free People
    • 21 Urban Outfitters
    • 16 Anthropologie
    • 1 Terrain
    • 1 BHLDN
  • Planning 2H margin improvement based on product content and lower mark down rates
  • Planning mid teens increase in SG&A for the remainder in the year due to DTC investments, ramp in marketing and further investments in people
  • Capex: $190-$200mm driven by new stores, fulfillment center and home office expansion
  • 2013 Effective tax rate 36.5%




Inventory Fullfillment:

  • Will satisfy customer demand & Reduce out of stock
  • Will focus on fulfilling from locations where demand is weakest
  • Some exclusive items are being returned to stores, with new system, items can be shipped back without mark down potential


  • Substantial improvement in aesthetic & product content in Catalog- better customer focused product
  • Seeing progress in merchandising assortment
  • Will be awhile before reaching rhythm of Anthropologie from years ago
  • Expecting to take some markdowns but seeing strong fundamental signs
  • Anthropoloie working on complete overhaul of website- it has gotten stale just like calendar was stale before recent refresh
  • Working on rightsizing the Home size based on market
  • Still working towards desirable pricing/product mix
  • UK requiring localization- Will develop and source product specific to certain markets (both brand and designers); brand remains scalable

Urban Outfitters:

  • Website- approach to visual can be improved
  • Plan to do some additional cross referencing across channels (recently referenced in store sales online which yielded a productive week)

Free People:

  • Have added new components to intimates site
  • Expanding other categories beyond Free People Intimates
  • Continue to work on social media aspect of site and blog- getting new reader with updated blog and look books

Loyalty programs

  • Urban and free people in process of launching loyalty program
  • Anthropologie in the process of reinvigorating loyalty brand
  • See nice lift in traffic as a result


  • Category mix shift driving 11% cost increase in inventories as opposed to cost inflation
  • Inventories were relatively clean at the end of Q4
  • All buyers make mistakes- in the process of clearing some excess through markdowns
  • 90 day ownership better than the prior year
  • Expect to make incremental progress as the year develops on markdowns
  • Change in mix driving shift in AUR with weather increasing amount of inventory
  • Expecting to return to desired inventory levels but will remain slightly elevated due to mix change

Top Line Guidance

  • Remain optimistic and believe inventory is well positioned
  • Expecting to take fewer mark downs as the year progresses
  • There MAY have been a pull forward in sales but not guaranteed

Fashion Shift

  • Seeing Fashion shift towards bottoms
  • Traditionally impacts women who want to go out and invest in new wardrobe items
  • Duration of trend is unpredictable but typically last for some time
  • Merchants are in touch with demand and are planning inventories accordingly
  • Shift implies tops are less desirable, though some remain strong
  • Will be additional mark downs in some top categories that aren't selling as well as last year

New Store Productivity:

  • New stores opened in Q1 are performing at or above plan


  • Great deal of strength in European DTC in Q1 at Urban Outfitters
  • Businesses on the continent performed stronger than the UK in stores (issues with cold wet weather)
  • Saw an over penetration in outerwear with seasonal product sales soft from cold weather
  • Women's apparel most challenged business in the UK though it has been performing well in DTC and Continent
  • All 3 brands have significant opportunity to expand presence in Europe and Asia
  • Free People will be launching wholesale into the UK over the next
  • Launching Free People DTC into Asia over the next 18 months
  • Urban will also be launching presence in Asia over the next 18 months
  • Ran a Spring season sale focused in the UK to keep inventory levels in check
  • Anthropologie requiring localized assortment similar to Urban Outfitters

Gross Margin Guidance:

  • Implies sequential deterioration in YoY margin rate change
  • Planning occupancy deleverage in 2Q
  • Opening 8 new stores above new stores opened in 2H12 as well as non comparable European stores
  • There are markdowns anticipated in certain women's categories
  • Planning for 200-250bps of improvement in annual GM rate

North America:

  • East Coast followed by Midwest and South saw greatest growth in the US
  • Some European stores suffered from cold/rainy weather- seeing direct correlation with weather
  • Major Malls performing the best

DTC Mix Shift:

  • Investing in the DTC business
  • Have only been in DTC business for 10-12 years- already captured 20% of sales
  • Expect the business to continue to grow at current rates if not accelerate
  • Expect DTC penetration to reach 40% relatively quickly and anticipate rate going up




Selling Zone: SP500 Levels, Refreshed

POSITIONS: Long Healthcare (XLV) Long Consumer Discretionary (XLY), Short Industrials (XLI)


I came into today a lot longer than I am now. I sold by my SPY and AAPL as we push toward my Selling Zone.


Since Equity Volatility has moved back to bullish TRADE and TREND, I can change the duration and volume assumptions in my immediate-term TRADE calculation in order to generate a range of probabilities instead of a point.


In other words, there are 2 immediate-term TRADE lines (1315 and 1329), and that generates my Selling Zone. On the way up towards that zone I want to be selling longs first, then re-shorting best ideas, selectively.


Across risk management durations that matter most, here are my lines right now: 

  1. Intermediate-term TREND resistance = 1369
  2. Immediate-term TRADE zone = 1
  3. Long-term TAIL support = 1282 

We held my long-term TAIL of 1282, and that’s the most bullish thing I can tell you. But I am also telling you to sell down gross and/or net exposure on the way up. Unless we see  a close > 1369, the intermediate-term view for Q2 remains bearish.


Keep moving out there,



Keith R. McCullough
Chief Executive Officer


Selling Zone: SP500 Levels, Refreshed - SPX

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