TODAY’S S&P 500 SET-UP – August 15, 2012

As we look at today’s set up for the S&P 500, the range is 10 points or -0.56% downside to 1396 and 0.15% upside to 1406. 











    • Increase versus the prior day’s trading of -799
  • VOLUME: on 08/14 NYSE 566.69
    • Increase versus prior day’s trading of 17.07%
  • VIX:  as of 08/14 was at 14.85
    • Increase versus most recent day’s trading of 8.39%
    • Year-to-date decrease of -36.54%
  • SPX PUT/CALL RATIO: as of 08/14 closed at 1.87
    • Up from the day prior at 1.54 


QE – Gold doesn’t like this Romney/Ryan ticket calling the “Feds Qe as inflation risk”; USD stabilizing at TREND line 81.68 support as Gold fails again at 1624 TREND resistance; 10yr bond yields put on one heck of a move too; imagine life without Bernanke leaning on the curve… 

  • TED SPREAD: as of this morning 33
  • 3-MONTH T-BILL YIELD: as of this morning 0.11%
  • 10-Year: as of this morning 1.76%
    • Increased from prior day’s trading of 1.74%
  • YIELD CURVE: as of this morning 1.48
    • Up from prior day’s trading of 1.46 

MACRO DATA POINTS (Bloomberg Estimates)

  • 7am: MBA Mortgage Applications, Aug. 10 (prior -1.8%)
  • 8:30am: Consumer Price Index M/m, July, est. 0.2% (prior 0.0%)
  • 8:30am: Empire Manufacturing, Aug., est. 7 (prior 7.39)
  • 9am: Total Net TIC Flows, June (prior $101.7b)
  • 9:15am: Industrial Production, July, est. 0.5% (prior 0.4%)
  • 9:15am: Capacity Utilization, July, est. 79.2% (prior 78.9%)
  • 9:15am: Manufacturing (SIC) Production, July, est. 0.5%, (prior 0.7%)
  • 10am: NAHB Housing Market Index, Aug., est. 35 (prior 35)
  • 10:30am: DOE inventories
  • 11am: Fed to sell $7b-$8b notes due 9/15/14-4/30/15
  • 8pm: Fed’s Kocherlakota speaks on the Fed in Minot, North Dakota


    • House, Senate not in session
    • First Lady Michelle Obama joins President Obama for campaign events in Dubuque, Davenport, Iowa
    • Paul Ryan attends campaign event in Oxford, Ohio. 6pm
    • HHS Secretary Kathleen Sebelius makes Affordable Care Act announcement in Jacksonville, Fla. 11:30am
    • NLRB holds closed meeting on unfair labor practices. 2:30pm
    • Thompson edges out Hovde in Wisconsin Republican Senate primary 


  • U.S. consumer prices probably rose for 1st time since March, forecast 0.2% gain in CPI
  • Retailers to start payments network to take on Google: WSJ
  • Standard Chartered rises, pays $340m to settle a N.Y. money laundering probe
  • Australia to become 1st nation to require cigarettes to be sold in uniform packages; watch Philip Morris International
  • Soros, Cohen’s SAC, Moore among Facebook holders at June end
  • Berkshire adds National Oilwell, cuts P&G stake
  • Ackman’s Pershing sells Kraft to buy stake in P&G
  • Moore leads funds avoiding “dead money” in JPMorgan sales
  • Carlyle Group said to be leading bidder to buy Getty Images
  • Facebook testing service to include more ads in user news feeds
  • Forest Labs holders vote on Icahn nominees at annual meeting
  • Credit-card delinquencies, charge-offs to be released
  • BMW’s U.S. sales queried after July 31 “discount day": WSJ
  • Samsung witness says Apple knew of his ‘‘tablet’’ long before iPad
  • MSCI index quarterly rebalancing


    • Staples (SPLS) 6am, $0.22
    • Abercrombie & Fitch (ANF) 7am, $0.17
    • Deere (DE) 7am, $2.32
    • Target (TGT) 7:30am, $1.01
    • NetApp (NTAP) 4pm, $0.38
    • PetSmart (PETM) 4:02pm, $0.66
    • Agilent Technologies (A) 4:05pm, $0.83
    • Applied Materials (AMAT) 4:05pm, $0.22
    • CACI International (CACI) 4:05pm, $1.50
    • Cisco Systems (CSCO) 4:05pm, $0.46
    • Ltd Brands (LTD) 4:30pm, $0.48



COPPER – the Doctor has been prescribing the same economic message throughout this 6 wk no volume squeeze in everything equities; no support to $3.30/lb; if/when that snaps, copper could go a lot lower on fundamentals (Chinese, German, US demand). 

  • Paulson Steps Up Gold Bet to 44% of Hedge Fund’s Equity Assets
  • Rusal Beating Metal as Near-Record Reserves Elusive: Commodities
  • Oil Declines in New York Amid Signs of Increasing U.S. Supplies
  • China’s Corn Harvest Set for Smaller Increase on Pest Attack
  • Soybeans Rise on Signs Demand Remains Robust After Record Rally
  • Gold Seen Declining in London on Reduced Fed Stimulus Outlook
  • Copper Seen Falling as China May Struggle to Sustain Growth Pace
  • Wilmar Falls After Posting 70% Profit Drop: Singapore Mover
  • Cocoa Climbs on Speculation El Nino Is Developing; Sugar Rises
  • Palm Oil Drops as Output Gains Set to Boost Malaysian Reserves
  • Hermes Sees Crops Extending Gains From Record on Lower Supply
  • Cotton Set to Climb 9% as China May Absorb Global Surplus
  • Aluminum Premiums Set to Extend Gains as Buyers Wait for Metal
  • Natural Gas Futures Decline After Rebounding From Six-Week Low
  • China Said to Ask Cooking-Oil Suppliers to Report Prices
  • Paulson, Soros Add to Gold Hoard as Prices Drop Most Since 2008
  • China Nickel Pig Iron Makers Cut Output by Half as Prices Slump















CHINA – headline media “news” last wk was don’t worry about the economic data (#GrowthSlowing) because China is going to cut rates and provide stimuli – reality: PBOC says no on both ($114 Brent Oil crushes consumption), and Chinese stocks are down -2% this wk.










The Hedgeye Macro Team

KORS: The Story Has Fundamentally Changed

Takeaway: We’ve been KORS agnostic. But today we don’t think we can call KORS expensive – even after the pop - for now this name is unshortable.


Conclusion: We’ve been KORS agnostic since we issued our Black Book on March 12th. But today we don’t think we can call KORS expensive – even after the pop.  Every line of the P&L is on fire, and share gain from COH is unmistakable. We don’t love the inventories, and think that people will need to appropriately model occupancy for when comps slow, but for now it does not matter.  This name is unshortable at this price.



Straight 'A's for KORS this quarter. Every line of the P&L flies in the face of every global macro headwind the rest of the world is seeing. We don’t love the inventories, and think that people will need to appropriately model occupancy for when comps slow, but for now it does not matter. The only super bearish factor relates to COH, not KORS. The share shift is unmistakable.

Check out the math:


KORS: The Story Has Fundamentally Changed - KORS Share Chart


The clear takeaway from KOR’s Q1 results is simply the share it’s taking from COH. The contrast between the KORS results and what we saw out of COH is startling. Given the magnitude of the beat, margin trajectory, and more constructive outlook for F13, the intermediate-term tailwind behind this story remains firmly intact. As such, this story will remain expensive as great brands with robust earnings momentum and conservative expectations often do. We’d still rather buy FNP than KORS.

What We Liked:

  • Every line on the P&L came in better than expected with the top-line accelerating on both a 1 and 2-year basis by over 1000bps (to 71% yy). KORS levered that to +149% EBIT and +156% EPS growth.
  • Growth was driven by solid performance across all channels driven by Retail with +31pts from comp stores and +7pts from new stores along with Wholesale contributing +30pts and another +3pts from Licensing. With 23 stores opened in the quarter, KORS is tracking ahead of its plan for ~70 stores in F13. In fact, management suggested that it could be tracking closer to 75 stores for the year. In addition, store productivity continues to improve and is now approaching a run-rate of $1,600/sq. ft. With the retail channel accounting for nearly 2/3 of F13 growth in our model the incremental rate of door growth and productivity continues to be positive.
  • Unlike its major competitor, KORS is experiencing solid growth at wholesale with comps up double-digits driven by category expansion (small leather goods, footwear, etc.) in addition to shop-in-shop conversions, which are running ahead of plan and the company’s target of 100 for the year. At this rate we think they are likely running ahead of our expectation of 150 conversions, which would account for at least 5pts of total revenue growth in F13 alone.     
  • Gross margins: While the mix shift towards retail remains a key gross margin driver over a multiyear period, less discounting/markdown activity also contributed to the +415bps increase. This is in stark contrast to COH which was impacted by an increasingly promotional environment and re-instated couponing just a quarter after eliminating the practice.
  • European strength: It's been a while since we've heard a U.S. company note that its European business is ahead of expectations. Well, that’s exactly what KORS did. Yes, Europe still accounts for just under 10% of business so the bar is low, but KORS stores are comping up +23%. We don’t care how small of a footprint they have, demand is there for more – which is exactly what they got.

What We Didn’t Like:

  • Inventory growth was the biggest item we flagged last quarter and that continues to be the case. The  sales/inventory spread eroded 30pts to -31% with inventories up +102% outpacing sales growth of +71%. Given the rate of store growth, we’re willing to give the company a pass to a point, but it will be important to see this spread shift direction over the next quarter or two.
  • For those of you who are modeling out beyond a couple of quarters, keep in mind KORS’ occupancy costs. We think that the comp needed to leverage occupancy is 2x that of other high-end retailers. In other words, KORS could print an 8% comp and still barely leverage occupancy. This is often the case with retailers that are in a hyper-comp stage, as this is partly because of a mix shift towards very expensive real estate, which carries much higher sales per square foot. With comps up so strong, an increase in the hurdle rate of a few points is un-noticeable. But if and when comps revert back to something below 10%, remember that leverage works both ways.

All in, the intermediate-term tailwind behind KORS remainsfirmly intact. We’re shaking out at $1.50 and $1.95 in FY13 and FY14, respectively. That’s about 96% EPS growth this year, and 31% next year. We can complain til we’re blue in the face that KORS is too expensive, but for a high end brand with this kind of share gain and growth trajectory, we could argue that 25x next year’s earnings are cheap. We wouldn’t buy it here on the pop, but we think that it is absolutely unshortable right now.



Share Shift - Youtube:


(KORS Q1cc) “Retail segment, we have experienced strong double-digit comp increases and we believe that we can
continue at double-digit sales pace in our North American Wholesale channel

(COH Q4cc) “Sales were driven by international wholesale shipments, while shipments into U.S. department stores declined…While in U.S. department stores, sales decreased moderately on a y-over-y basis in the quarter”


Casey Flavin



KORS: The Story Has Fundamentally Changed - KORS Margins


Accountability and Outlook: Here’s a look at KORS’s variance between guidance and actual, as well as outlook
for F13 vs expectations:


KORS: The Story Has Fundamentally Changed - KORS GTable






Takeaway: MGM and PCLN commentary not matching up despite historical correlation

Priceline bookings closely correlate to Strip room rates 



  • Correlation between YoY change in Priceline's booked ADR and Strip ADR was 88% over the past 2 1/2 years
  • Despite Priceline's warning about Q3 bookings and ADR, MGM management cited a recent improvement in consumer trends
  • We remain skeptical of a Las Vegas Strip comeback this year and the long-term demographic picture may impede a return to peak metrics



Is The Manheim Index Signaling A Market Crash?

Takeaway: If correlations serve us correctly, we're due for a big drop in the S&P 500 rather soon.

The Manheim Index is a used car index that essentially values what used cars are worth. The company is the largest buyer of used cars in America, which it then auctions off. An index reading of 100 corresponds to January 1995.


If you look at the chart we’ve posted below, there appears to be a correlation with the S&P 500 vs the Manheim Index. In periods when the index went negative in terms of year-over-year growth (the black dips), the S&P 500 dropped hard and fast. This occurred back in 2001-2002 (dotcom bubble), 2007-2008 (credit crisis) and if we look at the chart now, it appears the S&P 500 is about to turn along with the index. This could be a sign that we’ve peaked at the 1400 S&P 500 level.


Correlations are just that, but we think this one has legs. It’s rarely discussed in the media and we think that it’s only a matter of time before stocks drop.



Is The Manheim Index Signaling A Market Crash?  - manheim SP500



Is The Manheim Index Signaling A Market Crash?  - manheim spx

Abysmal Volumes

Takeaway: It's tough being a broker. NYSE volumes have fallen off a cliff since July and continue to trend lower.

These days, a rally doesn't take much. Pump the bid a few times and you'll get whatever price you want. It's not secret that volume in the stock market has been awful, but just how awful is the question? The answer will blow your mind.


We continue to see massive drops in NYSE volume day after day and this chart clearly illustrates just how bad the situation has become. Since the end of July, volumes have fallen off a cliff. For the broker-dealers out there trying to make a buck of equities - it just isn't happening. And if the trend is any indication of what's to come, volumes are going to get even worse by year's end.



Abysmal Volumes - NYSE Volume

UA: Going For Growth

Takeaway: UA international growth has slowed. The company needs to work extra hard to grow on a global scale.

Under Armour (UA) is a company that has enjoyed domestic growth over the last decade. The company hasn’t made inroads or attempted to penetrate international markets. International sales account for a low percentage of overall sales. Getting UA into the UK could prove even harder on news that Dick’s Sporting Goods (DKS) won’t be making a grand entrance into the UK via JJB Sports.  


UA will ultimately make it into the UK and will grow its business there but it will be costly and will take more time with Dick’s out of the picture. As you can see from the chart, growth has slowed year-over-year between 2010 and 2011. That trend could continue into 2012 without an international push from UA.



UA: Going For Growth - UA intl

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