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TODAY’S S&P 500 SET-UP – June 14, 2012

As we look at today’s set up for the S&P 500, the range is 17 points or -0.75% downside to 1305 and 0.54% upside to 1322. 












  • ADVANCE/DECLINE LINE: on 6/13 NYSE -1219
    • Down from the prior day’s trading of 1640
  • VOLUME: on 6/13 NYSE 707.13
    • Decrease versus prior day’s trading of -2.32%
  • VIX:  as of 6/13 was at 24.27
    • Increase versus most recent day’s trading of 9.87%
    • Year-to-date increase of 3.72%%
  • SPX PUT/CALL RATIO: as of 6/13 closed at 2.08
    • Up from the day prior at 1.47 


  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.09%
  • 10-Year: as of this morning 1.60
    • Increase from prior day’s trading at 1.59
  • YIELD CURVE: as of this morning 1.31
    • Up from prior day’s trading at 1.30 

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Current Account Balance, 1Q, est. -$131.9b (prior -124.1b)
  • 8:30am: CPI (M/m), May, est. -0.2% (prior 0.0%)
  • 8:30am: CPI Ex Food & Energy (M/m), May, est. 0.2% (prior 0.2%)
  • 8:30am: Initial Jobless Claims, June 9, est. 375k (prior 377k)
  • 9:45 am: Bloomberg Consumer Comfort, June 10
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas change
  • 11am: U.S. Fed to purchase $1.5b-2.25b notes in 2/15/2036 to 5/15/2042 range
  • 1pm: U.S. to sell $13b 30-yr bonds (Reopening) 


    • President Obama visits World Trade Center site in NYC
    • Deadline set by federal judge for EPA to propose standards for soot pollution sought by environment groups
    • SEC holds closed meeting on enforcement matters, 2pm
    • Senate in session, House in recess
    • Senate Energy and Natural Resources holds hearing on competition between U.S., China on clean energy, 9:30am
    • House Oil and National Security Caucus holds discussion on gas prices, 12pm
    • World Bank President Robert Zoellick speaks at a luncheon at Peterson Institute, 12pm 


  • Moody’s cuts Spain’s credit rating 3 steps to Baa3
  • Spanish-German 10-yr. yld spread widens to euro-era record
  • Italy sells EU3b of 3y bonds in first time after Spain bailout
  • Nokia to cut 10,000 jobs globally by end 2013, trims outlook
  • Swiss central bank pledges to defend franc cap
  • Microsoft said to be in discussions to buy Yammer
  • Felda Global Ventures said to raise $3.3b in IPO
  • U.S. consumer prices probably fell for first time in 2yrs
  • ABC, NBC, Fox said to finish ad sales orders for next season
  • U.S. foreclosure filings fall 4% as lenders increase short sales
  • Vector Capital raises Technicolor offer to EU2-shr 


    • Pier 1 Imports (PIR), 6am, $0.16
    • Smithfield Foods (SFD) 6am, $0.53
    • Kroger (KR) 8:15am, $0.73 


  • BofA Beating JPMorgan After French Lenders Retreat: Commodities
  • Gold Advances for a Fifth Day in London on Stimulus Speculation
  • Oil Trades Near Eight-Month Low as OPEC Reviews Output Targets
  • Copper Seen Rising on Speculation About Further U.S. Stimulus
  • Cocoa at Four-Month High as Dry Weather May Reduce Next Harvest
  • Ore-Ship Rates to Reach 22-Year Low as More Vessels Leave Yards
  • U.K. Gas Falls as Norway Supply Rises, Work Halts Pipe Exports
  • Europe Fuel Exports to Be Eclipsed by U.S. Boom: Energy Markets
  • Rain, Pests Imperil India’s Wheat Crop as Warehouses Full
  • Venezuela Overtakes Saudis to Hold World’s Biggest Oil Reserves
  • OPEC Set to Keep Output Ceiling Unchanged Amid Europe Crisis
  • Aluminum May Decline 7.3% on Topping Pattern: Technical Analysis
  • Gulf Nations’ Break-Even on Oil Drops to $80: Deutsche Bank
  • Japan Buys LNG From Spain, Brazil as Spot Soars Near Record
  • South African Union Fight Threatens Biggest Platinum Suppliers
  • Guar Futures Trading Suspension in India May End Next Month
  • Indian Regulator Wants Banks Allowed in Commodity Futures 





USD – get the Dollar right and you’ll get a lot of other things right; USD finally found an immediate-term TRADE oversold level in the morning yesterday; that took the immediate-term bloom off Gold’s rose; we’reregistering a lower-high of resistance for Gold at $1633 now (was at 1648 yest) and oil continues to crash (down -24% since Feb).






ITALY – plenty of jib jab about Greece and Spain, meanwhile Italy continues to crash, down another -1% this morn and down -25% since March 19th (Spain is down -26% from its YTD top). Italy has economic stagflation, and that has historically traded at 7-8x EPS, so be careful calling things “cheap” (1970s stagflation is cheap).






ASIA – sold off across the board after more US Growth Slowing data (US Retail Sales missed and Consumer Discretionary led the market lower, -1.5% yest); China continues to make fresh 3mth lows and the bailout guys keep begging for more rate cuts – maybe they should cut every other day? Indonesia led decliners -1.8%; Japan remains a mess.










The Hedgeye Macro Team

NKE: How We’d Play It

Today’s sell-off in Nike is a great example of the volatililty we should continue to see in the name for the next two months. The cards are stacked against it near-term, which is a gift for someone who wants to respect this thing we call earnings power.

From a trading perspective, NKE is bearish TRADE and TREND on our models. We rarely make ‘the sentiment trade’ on Nike, and we’re not going to start today. As such, until either a) NKE’s volatility ebbs, b) eight weeks’ time passes, or c) it’s price corrects, we’d rather be long the quality growth in UA, which is bullish TRADE and TREND – the opposite of where Nike is sitting.  

There’s a very real mismatch with why we think the consensus owns Nike, versus why it SHOULD own Nike. The consensus view around Nike has been focused around near-term earnings upside and business momentum around key events and initiatives.

  1. Launch of the NFL deal. But that’s passed. NKE still reaps the benefits – and at an accelerating rate. But the initial splash has come and gone.
  2. Momentum in the North American business. Last quarter was 22% futures growth – the equivalent of adding an UnderArmour, and having $300mm left over.  We can’t imagine that anyone thinks this is sustainable. But still, the rate is going down, not up.
  3. European Football Championships: Americans deny its existence, but this is bigger to Europeans than the Super Bowl and World Series combined. The event is halfway through.
  4. Launch of FlyKnit: Great new product, platform and manufacturing technology for Nike. It hits stores in full within a month. That’s great, but too many people are asking us about it. We don’t like when people get too pumped on a single initiative. Over 2-3 years, it definitely matters. But no single product can make or break this company.    
  5. ‘The Olympic Trade’. We never could justify the rationale behind it. But it exists. No one is buying the stock now based on the event, but unfortunately those that are simply there to rent the stock rather than own the company will need to exit.

We still think that the REAL call is that Nike is going to ‘three-peat’. It’s having a great FY12. That will happen again in FY13, and again in FY14. We think it’s largely top line driven, but we’ll also see a meaningful recovery in Gross Margins due to growth in consumer direct, better pricing power, lower product costs, and fewer close outs due to a more efficient manufacturing process.

If we could craft this perfectly, it would be for long investors to wait for the ‘freak out’ event sometime over the next 8 weeks. If it doesn’t happen, then it’s probably because the company is giving the Street ammo to take up numbers in the outer years. In that event, we’d be comfortable getting in late – even at or above the current price – as the stock is trading today at less than 13x our May14 estimate. If our $8.00 number is correct, then we’ll be looking at a CAGR of about 20%. What kind of multiple do you put on that kind of growth for a quality global growth story like Nike with 25%+ return on capital? Let’s say it’s a slight discount to its PEG. Maybe 18x? $144 Stock.



HedgeyeRetail: Key Issue Today. Nike in China

With Li Ning’s preannouncement about high inventories and weak orders, it’s easy to jump to conclusions. But when you quantify one business vs. the other, it opens up the question as to whether Nike is causing Li Ning’s problems, not sharing them.


Let’s put some context around Li Ning’s (top local athletic footwear brand in China) preannouncement yesterday, and what the numbers really mean for Nike. The bottom line is that it’s definitely not a positive data point. But in really looking at the size of Nike’s business in China as well as its previously disclosed inventory position, it makes perfect sense that the little guy got crushed. In fact, we’re surprised that we have yet to see the same out of Anta.

Consider the following:

  1. Nike China will clock in about $2.6bn in revenue this year, double that of Li Ning.
  2. Nike, however, leverages that into $900mm of EBIT, compared to $70mm for Li-Ning. Even if we adjust for 15% opex infrastructure given that Li Ning is based in China and Nike carries much of its costs out of the US, it’s still churning out EBIT at 5x the rate of Li Ning.
  3. Nike ended last quarter with 32% growth in inventory. That’s an incremental $820mm yy. This was  heavily weighted to China and Europe. China alone accounted for 13% of Nike inventory growth.

The bottom line is that Nike’s yy growth of $104mm in inventory in China is 1.5x the size of the ENTIRE profit stream generated by Li Ning. Is Nike in the same boat as it relates to Chinese growth slowing? Sure. But a) slowing to the mid-20%s ain’t half bad, and b) we have to consider that Li Ning’s preannouncement was CAUSED BY Nike, instead of being in conjunction with Nike.


HedgeyeRetail: Key Issue Today. Nike in China - NKE LiNing



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  • Mature regional gaming markets remain under pressure from new competition, the housing malaise, and an aging customer base.  All of these trends are likely to continue.
  • With four out of the five mature regional gaming states having reported gaming revenue numbers (excluding MS due to flooding), May is looking ugly and SSS could be down 3%
  • February’s pivot turn may be cyclical as gaming has proven to be one of the most economically sensitive consumer sectors


HOUSING: Finally, a solid foundation?

The weekly Mortgage Bankers Association purchase applications numbers are out. It  deals with how many mortgage applications have been filed over a particular week. Hedgeye Financials Sector Head Josh Steiner took note that this week’s print of up 13% was “extremely” strong.


HOUSING: Finally, a solid foundation? - mbachart


Memorial Day seems to be the catalyst here. The week of Memorial Day is traditionally weak with a negative print, followed by a positive jump in applications the following week. That’s averaged about +6.4% week over week from 2008-2011. This +13% number shows that mortgage application volume is going strong and will continue to do so as we head further into June.


The trade here is to be wary of shorting housing. Steiner thinks that shorting housing into the June 27th report for May pending home sales is not the way to go. Looking at the chart above, it’s apparent that something positive is in the works.


We’ve got a conference call for our institutional clients scheduled with President of the Restaurant Finance Monitor and industry expert John Hamburger next Tuesday at 11am ET.  Hedgeye Restaurants Sector Head Howard Penney will be discussing the risks and issues related to heavily franchised business models,  and he will focus on those companies that stand to benefit most from the franchising model.


It should be well known at this point that there can be tensions between franchisees and franchisors. That’s to be expected, especially in a period of economic downturn. The weak will eventually get nudged out of the business and the stronger franchisees will wield their power to battle with the franchisor over capital intensive projects like store revamps and new menu items. Ultimately, investors and businesses will suffer when this occurs.


In this case, the phrase “keep your eye on the prize” has significant meaning. Sustainable profits and long term goals are important. Prioritizing revenue can cause both parties to compete and when the competition heats up, everyone loses.


If you’re a current client or are considering a subscription to Hedgeye, please email sales@hedgeye.com if you’re interested in listening in to the call with Penney and Hamburger.

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