The Other Side

“If one side of every transaction is wrong, we have to ponder why we should think it’s not us.”

-Howard Marks


Yesterday afternoon, as I was flying back to New York from California, I was watching the market go against me by -0.12% (I’m short the SP500 at 1375). It’s never easy taking The Other Side of a market up move. Being a successful short seller in this business is the ultimate game of survival. Your skin needs to be thick, and you need to be able to take a punch.


I’ve made thousands of short sales in my career. Each time feels different. Feeling in this profession is what you’re not supposed to do. But you do. You’re going to feel the love when you are right. You’re going to feel shame when you are wrong. No matter what you are feeling, the best advice I can give is to keep searching – keep asking yourself what you’re missing.


Mr Macro Market is usually pretty good at reminding you when and where you could be wrong. That makes our search easier. Embracing the uncertainty that each and every dynamic risk management factor throughout each day brings is at the core of what I do. As Howard Marks wrote in his recent June letter: “Active management has to be seen as the search for mistakes.”


Back to the Global Macro Grind


The Other Side of the bear case for the SP500 is the current bull case – bailouts. Yesterday’s US economic data was awful. US Leading Indicators (LEI) slowed -0.3% in June versus +0.4% in May. Existing Home Sales for June dropped -5.4% and weekly US jobless claims shot straight back up to their YTD highs of 386,000.


So, on the “news” the market sold off and went red for an hour or so, but quickly recovered and went green as more #BailoutBull calls for Qe5 re-surfaced. In conjunction with the Bernanke Begging, the US Dollar went down, Oil went straight up, and all was well in the land of another no-volume stock market rally to lower long-term highs (-12% from the 2007 peak).


So what’s on The Other Side of the other side? What happens if the Global Macro and US Economic data goes bullish? Would that make me more wrong being short the SP500 (and Oil, we shorted that at yesterday’s highs too)? Or would that just make me wrong on my research view which, in turn, takes out the #BailoutBull and makes me more right for the wrong reasons?


Who knows…


Regardless, this is starting to sound all too complex for we commoners being centrally planned by the 112th to simplify.


The Other Side of the bull case for this SP500 rally to continue has 3 core factors:

  1. PRICE – SP500 immediate-term TRADE overbought anywhere > 1375
  2. VOLATILITY – VIX immediate-term TRADE oversold anywhere < 16
  3. VOLUME – continuing to register the nastiest volume signals ever in my model

That last factor was easily the most controversial topic I debated with clients in CA this week. Since US Equities continue to see outflows, where is the stock market’s bid coming from? I say short covering. And the ultimate question we need to answer this morning is how much of that do we have left?


The good news is that short interest data is trivial. Darius Dale highlights one way to look at long-term short-interest as today’s Chart of The Day. What you’ll note in this chart is that short interest as a % of the NYSE shares outstanding has been oscillating between 3-5% since this whole gong show of free money bailouts started in late 2007.


What you’ll also notice is that short interest spiked back up to 3.86% in June 2012, but that it came from a relatively low place (on a 5 year basis) for the 4-6 months prior to that. Yes, Beta Hedgies short low and cover high.


Are the consensus hedge fund short sellers covering high when the VIX goes low, again? I can literally see it in each security I am bear hunting in. Where I could be wrong is if I am hunting in the wrong neck of the woods. If I am right, eviscerated short interest looks like it’s turning into a huge market liability. Markets fall fastest after the consensus shorts have covered.


Where else could I be wrong on this? All over the place. What if short interest is absolutely ripping to the upside (4-5% of total shares outstanding) here in July? What if no one has covered any of their shorts this week? What if it really is different this time and 15 VIX is a cover all your shorts signal?


Only time will tell. But, in the meantime, I can assure you of this – very few PMs understood this in Q4 of 2008. Remember when every fundamental #GrowthSlowing short seller was being dared to cover their shorts in fear of the next central plan? Remember “shock & awe” rate cuts and Hank Paulson’s “bazooka” daily whip around in the market?


I do. And so does Santayana: “Those who cannot remember the past are condemned to repeat it.”


My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, Italy’s MIB Index, and the SP500 are now $1, $102.28-108.79, $82.75-83.94, $1.21-1.23, 13,468-13,703, and 1, respectively.


Best of luck out there today and have a great weekend,



Keith R. McCullough
Chief Executive Officer


The Other Side - Chart of the Day


The Other Side - Virtual Portfolio


If this company is talking about a sluggish macro environment, it does not bode well for the rest of earnings season.


Chipotle Mexican Grill’s stock is down after hours following the company missing top line expectations in 2Q.  Earnings per share came in at $2.56, which was  11.6% above expectations of $2.29 . Same-restaurant sales grew 8% versus 2Q10, well below the 10% that consensus expected.  Despite restaurant operating margins of 29.2% and cost of sales coming down 80bps, versus 2Q11, as a percentage of sales, the revenue miss was front-and-center for investors. 


During the earnings call, management repeatedly mentioned the slowing economy as a drag on what was a disappointing quarter from a sales perspective:  “In fact we believe that our throughput performance would have been even better had we not seen some fall- off in transactions during the quarter, which we believe is due to the sluggishness in the overall economy and a slowing in consumer spending.” 


The stock was down 7-8% on the print but, following the conference call, is currently trading down 11%.









Howard Penney

Managing Director


Rory Green




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Pay Attention to JJB

This JJB update that sales and margins continue to slide tells us a number of things… (FYI, JJB is like The Sports Authority of the UK).

1) Things ain’t gettin’ any better in European retail

2) Confirmation that The European Championship was a bust.  Here’s a good theory from Moshe Silver, Hedgeye’s ever-watchful head of compliance. In his words “Further to your mention of weak Championship sales: the semi-finalists in the Euro Cup were Germany, Portugal, Italy and Spain – with Spain winning the Cup.  50% unemployment in Spain ages 30 and under, and not much better in Italy or Portugal.  Only the Germans can afford much in the way of discretionary spending, and they obviously weren’t jamming the barricades to buy Spanish jerseys.  Maybe it’s simply the fact that the folks who would love to buy championship gear just can’t afford to?  Except for the odd American (like me) who was in Madrid for the championship celebration, who would buy Team Spain?”

3) Dick’s Sporting Goods threw JJB a $31.8mm lifeline in April, buying a call option to become the controlling shareholder in 1Q13. With JJB on the ropes, our sense is that DKS will both protect and accelerate its investment, and potentially buy the entire entity in 2H.

4) Other creditors, including Adidas, have also flexed to get JJB in order. Interestingly, Nike has not been mentioned in the general press as one of those parties.

5) A wrinkle here is that Sports Direct – which is one of the thorns in JJB’s side – might have to deal with a far superior competitor in Dick’s Sporting Goods. But DKS holds the exclusive for Umbro in the US – a brand that Sports Direct has a vested interest in buying now that Nike has announced its planned divestiture. The primary shareholder of Sports Direct – Mike Ashley – has been extremely non-valuation-sensitive (and dare we say ego centric) with purchases in the past. He’ll want to own Umbro to use as a competitive weapon against DKS. The Punchline? The winner here might be Nike’s valuation for Umbro. 

Short The Market


Hedgeye Director of Research Daryl Jones appeared on CNBC today to discuss the momentum in stocks in the heat of earnings season.  Daryl isn’t afraid to make a bold call like shorting the S&P 500, Others may disagree, but combined with our quantitative and fundamental valuations, we see opportunity where others don’t.


Valuing Sports Dollars

With Manchester United looking to raise approximately $300mm in an IPO, we should take a minute to put a few things into perspective around the values of sports teams, and brands that endorse them.


A) As it relates to the full value of Manchester United, it has nearly 400mm fans worldwide. Note to you/us Yankee fans who think it is the top team in the world – there are only 310mm people in the US, and outside our borders no one cares about the Yankees. Forbes ranks Manchester United as the number 1 team globally with a value of about $2.23bn. Next is Spain’s Real Madrid at $1.88bn. The Yankees manage to come in next in line at $1.85bn, but the interesting callout is that it is tied for third with the Dallas Cowboys. Then there’s a big step down to the Washington Redskins at $1.56bn, and no other teams passing the $1.5bn mark. As it relates to changes in value over the past year on the margin, here are some callouts amongst the top 50 franchises in looking at last year’s Forbes values vs what it is reporting today.

  1. The most notable point, by far, is that the two teams with the greatest increase in value are both in Los Angeles. The next two teams on the list are in Spain (FC Barcelona and Real Madrid). We get the California angle, but is Forbes watching what’s going on in Spain? Not so sure about that.
  2. As bullish as a $1.4bn valuation might sound for the Dodgers, the team was purchased by Guggenheim Baseball in April for $2bn which was based on an impending local TV deal that is expected to be worth nearly $3.5bn in cash and equity. Steve Forbes is probably getting several angry phone calls this week questioning valuation math.
  3. Despite the Juventus Football Club moving into a new stadium this year with a 49% increase in capacity, it fell off the top 50 list and was replaced by the Texas Rangers. Now valued at $674mm, the Rangers won the AL West only to lose in the World Series for the second straight year in game 7. Regardless, attendance reached Franchise history highs and the team struck a 20yr cable deal with Fox Sports Southwest beginning in 2014 valued at $3bn.
  4. Only 5 of the top 20 clubs are Football/Soccer.
  5. 12 of 20 are US rules (NFL) Football. There’s a  little snippet for NFL fans that hate soccer.

Valuing Sports Dollars - increases in team value


B) It just so happens that Nike does, in fact, endorse Manchester United and pays in the vicinity of $40mm per year for the rights to manufacture ManU replica kits. It is anticipated that come 2015 when Manchester United’s current deal with Nike expires, they will be looking to ink a deal worth up to  £600m over 10 years. This is pre-contract negotiating in the press, but it’s interesting to note that if they get £60 per year (nearly $95mm annually), Manchester United would have the highest valued contract amongst Nike's high profile endorsements topping The French National Football Team, FC Barcelona,~7 Lebron James’ and 314 Tim Tebows…. 


Valuing Sports Dollars - Nike Endorsement Values


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