Dancing With the Bear

This note was originally published at 8am on May 31, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Theory helps us to bear out ignorance of facts.”

-George Santayana


I have a good friend whose dad is legendary for giving his sister’s suitors a difficult time.  As it’s been told to me, this young lady will bring guys she is dating home and her father will take them for a little walk outside and basically warn these young lads that they don’t want to dance with the bear – the bear being him.  Since he is a small town burly Canadian fire chief, the daughter’s suitors are pretty clear on the message.


As it relates to being stock market operators, I don’t think any of us enjoy dancing with bear markets.  A good friend of mine, and former colleague, is one of the head traders at a major mutual fund complex.  Every day I get his morning internal news summary which leads off with the ACWI etf, which is a proxy for global large cap equities.  On April 2ndhis note had the ACWI up +11.9% and on May 29thhe had the ACWI up +0.76%.  In effect, any investor who has a long only mandate has had to dance with the bears over the past couple of months and likely, just due to the inflexibility of their mandate, had to endure giving back performance.


But even as many of us have had to dance with U.S. and global equity bears, the Japanese have perhaps had it the worst.  The most populous bear in Japan is the Asian black bear, also called the moon or white chested bear, which is medium sized and, luckily enough, largely a herbivore.  While the Asian Black Bear is mostly focused on eating plants, the Japanese stock market has been focused on eating investors whole. Specifically, overnight the Nikkei close -1.1% and finished the month down -10.3%.


Our bearish thesis on Japan is, hopefully, at this point relatively well known.  In late February we hosted a conference call with a 100 page presentation (email us at if you aren’t a subscriber of our macro product and would like to trial and view the presentation) that outlined our view that Japan is facing a debt, deficit and demographic reckoning.  It seems Japanese equities are agreeing with us.  


One of the key catalysts we highlighted back then was the potential for a sovereign debt downgrade.  Early last week this catalyst came to fruition as Fitch downgraded Japan’s long-term local-currency sovereign debt rating one notch to A+; additionally, the agency reduced the country’s long-term foreign currency debt rating two notches to the same level.  As the other rating agencies follow suit and the ratings continue to tumble downwards, the larger risk is that the Japanese banking system has to do a massive capital raise in the future to keep their Tier 1 capital ratio at appropriate levels.  This is an increasingly realistic risk that you may want to bear in mind.


By the time you get this missive, the U.S. will have reported GDP and jobless claims this morning.  Both our predictive tracking algorithms and the stock market have been telling us that GDP is slowing and we would expect the data this morning to reflect the same.  On some level, of course, slowing growth is starting to be priced into the market.  Currently, in the Virtual Portfolio we are leaning slightly net long and have 8 longs and 7 shorts. 


The three most recent positions that we have added to the Virtual Portfolio on the long side are as follows:


1.   Apple (APPL) – As oil and commodities deflate, from a macro perspective the outlook for the iEconomy improves.  Additionally, and not that I have any edge of course, Apple is cheap at 10x forward earnings but also growing the top line, based on the last quarter, at north of 30%.  The simple fact is that many investors still don’t get that Apple is not a hardware company; it is a software company with long term sustainably high margins (think moat and barriers to entry).


2.   Amazon (AMZN) – Amazon, much like Apple, is a play on consumption which we believe continues to improve as oil, and energy input costs generally, continue to break down.  As my colleague Brian McGough wrote about Amazon yesterday:


“Let's not forget that it is the Haley’s Comet of retail. It's a retailer with $48bn in revenue growing at 40% with 2% EBIT margins that's investing on its balance sheet and p&l at a rate to make a third of retailers alive today extinct in 5+ years.”


3.   Utilities (XLU) – On our quantitative model, utilities are the only sector that is bullish on both TRADE and TREND durations.  This is in part due to the predictability of the cash flow streams in utilities and thus relatively safety, but also a compelling dividend yield of right around 4% which, when compared to the government bond market, is downright juicy.


So, even in the doldrums of dancing with the bear market, we’ve been able to find some compelling long ideas.  Time and price will tell whether they are rentals or names that, like Starbucks, we will hold for multiple years.  But the bottom line is this: if you are going to dance with the bear, be prepared to keep your hands, feet, and portfolio moving.


In fact as Wikihow instructs us, the top three tips for avoiding bear attacks are as follows:

  1. Avoid close encounters;
  2. Keep your distance; and
  3. Stand tall, even if the bear charges you.

For stock market operators, the last point is probably the most instructive and translates into buying high quality names when the bear market is charging away and providing a compelling entry point.


Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1546-1571, $103.27-106.97, $81.99-83.24, $1.23-1.26, and 1295-1334, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Dancing With the Bear - Chart of the Day


Dancing With the Bear - Virtual Portfolio


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.



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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




  • 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.

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