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TODAY’S S&P 500 SET-UP – June 22, 2012

As we look at today’s set up for the S&P 500, the range is 15 points or -0.57% downside to 1318 and 0.57% upside to 1333. 












  • ADVANCE/DECLINE LINE: on 6/21 NYSE -1901
    • Down from the prior day’s trading of 10
  • VOLUME: on 6/21 NYSE 865.87
    • Increase versus prior day’s trading of 15.27%
  • VIX:  as of 6/21 was at 20.08
    • Increase versus most recent day’s trading of 16.47%
    • Year-to-date decrease of -14.19%
  • SPX PUT/CALL RATIO: as of 6/21 closed at 1.81
    • Down from the day prior at 1.90 


YIELD SPREAD – watch this 10s/2s Spread in the US like a hawk; it’s at 133bps wide this morning and still holding the low end of its recent range – historically, the Yield Spread always mean reverts to dead flat. That’s your bear case for bank earnings from here which, incidentally, we think is a much more relevant next catalyst for the money centers than whatever Moodys figured out after the fact. 

  • TED SPREAD: as of this morning 38
  • 3-MONTH T-BILL YIELD: as of this morning 0.08%
  • 10-Year: as of this morning 1.64
    • Increase from prior day’s trading at 1.62
  • YIELD CURVE: as of this morning 1.34
    • Up from prior day’s trading at 1.32 

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: Fed to purchase $1.5b-$2.25b notes in 2/15/2036-5/15/2042 range
  • 12:30pm: Federal Reserve Bank of Cleveland President Sandra Pianalto speaks in Cleveland
  • 1pm: Baker Hughes rig count


    • House, Senate not in session
    • CFTC holds closed meeting on enforcement matters, 10am
    • U.S. Transportation Secretary Ray LaHood makes funding announcement on conference call, 10:15am


  • Moody’s downgrades 15 global banks; Morgan Stanley only cut 2 levels, Credit Suisse reduced by 3
  • Citigroup, other banks call Moody’s cuts unwarranted
  • German business confidence fell more than estimated in June
  • KKR said to consider sale of BIS unit ahead of refinance date
  • Italian consumer sentiment fell to a record low
  • AIG names Koellner as executive chairman of ILFC after CEO’s relationship is probed
  • International Game, Bally secure Nevada online casino licenses
  • Sony in final stages of talks to invest in Olympus: Nikkei
  • U.S. Health Care, EU Summit, Google, RIM: Week Ahead


    • Darden Restaurants (DRI) 7am, $1.15
    • Carnival (CCL) 9:15am, $0.08    



OILBernanke’s Bubbles (Commodities) are in some cases popping; others (oil) crashing. This morning we are finally getting an immediate-term TRADE oversold signal for Brent at $89.92, so cover Energy shorts here and re-short the bounce. Both the Commodity and the stocks that have earnings expectations based on the wrong top-line assumptions.

  • Crop Traders Bullish for Ninth Week on Dry Weather: Commodities
  • Copper Heads for Seventh Weekly Drop in Eight on Slowdown Signs
  • Gold Seen Cutting Weekly Decline as Europe Concern Spurs Demand
  • Brent Oil Futures Rise on Speculation Plunge Below $90 Excessive
  • Corn Climbs as Dry Midwest Weather Threatens to Hurt U.S. Yields
  • Batista Said to Sell 49% AUX Stake to Qatar Fund for $2 Billion
  • Sugar Falls as Supplies Seen Ample as Demand Slows; Coffee Drops
  • Fortescue Challenges Gillard’s Mining Tax in Australian Court
  • Jet Fuel Gets Olympic Spur as Europe Plants Shut: Energy Markets
  • Soy Harvest Squandered as Reserves Decline: Argentina Credit
  • Normal Monsoon for a Third Year Set to Boost India Harvests
  • Food Stamps Vie With Aid to Growers in U.S. Agriculture Overhaul
  • Aluminum Set to Extend Decline to 2010 Lows: Technical Analysis
  • Nippon Steel Stainless Unit Eyes Mergers as Japan Demand Wanes
  • Gazprom Biggest Loser as Shale Gas Upends World Markets: Energy
  • Deripaska Comfortable on Rusal Debt as Yields Up: Russia Credit










RUSSIA – while the Johnny come lately shorts in Spain cover all at the same time, Russian stocks continue to crash – get the petro and the Dollar right, and you’ll get the PetroDollar markets like Russia right. RTSI down another -2% here and crashing like oil has, down -27% since March. Context: Russia is the world’s 9th largest economy (Spain is 12th). There is no such thing as “de-coupling.”















The Hedgeye Macro Team

TGT: Locked and Loaded


Brian McGough, Managing Director of Retail (@HedgeyeRetail)





Target (TGT) is a stock that has a lot going for it at the moment. While we’re not of the opinion that the stock is going to pull a massive move and double in price within a one year timespan, several near-term factors will help drive margins at the mid-tier retailer.


First, crude oil is crashing. That has been obvious since the hysteria of the $108 a barrel price from earlier this year. With WTI crude now trading $80 a barrel, the fuel cost savings will be reflected in Target’s share price very soon if it follows in the footsteps of Walmart (WMT), which is up nearly 11% since the April breakdown of crude.


Another catalyst here is the mess going on at JC Penney (JCP) and the subsequent hemorrhaging of mid-tier market share along with Kohl’s (KSS). The shift we’re seeing is a consumer flight to stores like Ross (ROST) and TJ Maxx (TJX). Target will benefit from the change in sentiment and shopping.


Target’s last quarterly earnings report was a blow out. It’s weathering the retail storm quite nicely while companies like Bed, Bath & Beyond (BBBY) struggle to stay relevant and hold market share in the Home category. TGT remains a top five competitor in the space.


Lastly, TRADE (Duration = 3 weeks or less) and TREND (Duration = 3 weeks or less) support of $57.30 and $56.22, respectively, it is sitting at a point where the fundamentals and price mesh well within our framework.


You can really run the gamut with Target’s breadth of customers in terms of income level. People generally take a liking to the store, especially since it began touting itself as a clothing retailer that “gets fashion” over the last decade - hence why we are currently long TGT in our virtual portfolio.



TGT: Locked and Loaded - TGT trend



Correlation Risk In The Markets


We have been pounding the desk over correlation risk for some time now. The US dollar goes up and commodities and everything else go straight down. If you get growth and the dollar right, you’re going to get a lot of things right. This has proven particularly true after Wednesday’s Federal Reserve meeting and subsequent (lack of) announcements on monetary easing.


After our bold call to go 100% cash yesterday, we took it down to 94% and entered into some equities in the Hedgeye virtual portfolio. We will not overly short the market and nor will the retail crowd after three consecutive weeks of rallying – even after today’s selloff.


Goldman Sachs came out on Thursday and said that they are issuing a downside target of 1285 in the S&P 500. That’s their call. As Keith (McCullough, CEO of Hedgeye) said on CNBC’s Fast Money: “I don’t look to Goldman Sachs to tell me what to do.” What lies ahead for the market is not certain and until our levels, qualitative and quantitative analysis sync up, we are perfectly fine with our current asset allocation.

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HedgeyeRetail Visual: Valuation in a Different Light

Let’s throw traditional valuation metrics out the door for a minute and look at EV/Total Addressable Market Value. It suggests that some of the seemingly most expensive stocks are actually the cheapest – and vice/versa.


Tired of nit-picking over a point here or there in p/e, price/sales or EV/EBITDA?  Basing investment decisions on these metrics often obfuscate the real value proposition. We looked at EV/Total Addressable Market for a host of companies. It shows that some of the ‘most expensive’ stocks based on traditional metrics are actually among the cheapest on this methodology.


In our analysis, we not only look at the market size each company is targeting, but also apply two discount factors; 1) the extent to which the company has the operating infrastructure in place to garner increased share, and 2) whether management is capable of achieving this growth.



TGT: TRADE Idea Alert

Keith added TGT to the Hedgeye Virtual Portfolio today on the long side. To be clear, this is not a change in our fundamental view, and we don’t view TGT as one of those fat-TAIL 2-year doubles. But there are some near-term factors that should help TGT on the margin.


1) Oil down = TGT up. It’s interesting that since Crude Oil started to break down in the early part of April (Brent down by 22% in three months), TGT is down by 1%, and Wal-Mart is up 11% (and setting new highs). Yes, we understand that WMT serves a demographic with less disposable income, but there’s no fundamental reason why WMT would benefit from lower oil prices and TGT would not.

2) The JC Penney fiasco is resulting in a hemorrhage of market share in the mid-tier. The good news for TGT is that Kohl’s is not taking it. In fact, KSS is giving up additional share as well. We’re seeing the consumer shift to off-price channels as TJX and ROST pick up share. We’re even seeing the likes of Macy’s and Gap gain share. If those players benefit, TGT will too (and WMT will not).

3) Last quarter, TGT printed a blow-out number, which was at  the precise point where the organization should have otherwise shown weakness due to the management changes over the past nine months (Michael Francis likely kicking himself for going to JCP and subsequently getting fired last week).  BBBY is a good example of what happens when a company is ill prepared for changes in the competitive landscape, and logistics associated with big company events (HQ move). TGT is no BBBY.  In fact, BBBY is clearly losing share in the Home category. One of its top 5 competitors in that space is Target.

4) Lastly, with TRADE and TREND support of $57.30 and $56.22, respectively, it is sitting at a point where the fundamentals and price mesh well within Hedgeye’s Risk Management framework.


TGT vs. WMT. Vs. Brent Crude: Since Oil started breaking down, TGT is down 1% while WMT is up 11%. There’s no fundamental reason why TGT will not benefit as Oil drops.


TGT: TRADE Idea Alert - TGT


TGT: TRADE Idea Alert - TGT levels

UA: A Knight's Chase


Brian McGough, Managing Director of Retail (@HedgeyeRetail)



The case for Under Armour (UA) is an interesting one. After a meteoric rise in share price, the stock could be construed as a stock that’s “too expensive.” It’s up 100% since last August  after swooping in and taking market share from Nike. After today’s post-UBS downgrade pullback and the unveiling of a new line of footwear, we added UA to the virtual portfolio. The long-term outlook for the company is very solid despite the cautionary landscape in the near-term.



UA: A Knight's Chase - UA chart1



Using our TRADE, TREND and TAIL durations, here are three takeaways on why UA is a long:


TRADE (Duration = 3 weeks or less)

UA remains a bit expensive and footwear isn’t really going anywhere right now. Though business appears to be stable, there will be a capital-intensive marketing campaign surrounding UA’s new line of shoes. Our TRADE support line is at $98.78.


TREND (Duration = 3 months or more)

It appears that UA has finally got its inventory control levels sorted out and with a new management shake up that includes newly created positions, there’s a growth story here. UA is fixing problems that need to be addressed and by 2013, should be on its way to better margins and sales.


TAIL (Duration = 3 years or less)

We think that UA will put up $3 billion in revenue by 2014 after doing just $1.5 billion in 2011. Where does the growth come from? The incremental top line breaks out as follows. a) $500mm in core apparel growth, b) $300mm in incremental footwear, c) $300mm in international apparel, d) $250mm in women’s apparel, e) $125mm in accessories (having brought hats and bags licenses in house).



UA: A Knight's Chase - UA chart2



Under Armour is not an immediate-term stock to chase around. There is serious growth potential here that companies like Lululemon Athletica (LULU) can only hope to achieve.

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