Breaking The Buck's TREND (red line) at 85.26

down -3% at 84.33 last...

Bernanke Breaks The Buck!

Never mind the manic media headline of “NO CHANGE” … there’s a BIG one here.

Allegedly, “Heli-Ben” is going to purchase $300B of longer-term Treasuries, $750B of MBS, $100B of GSEs…

This, as one of my macro teachers (Tim Russert) would have said “is BIG!”…

Why is it BIG?
1. Buying Treasuries breaks the buck
2. Buying Treasuries breaks the buck
3. Breaking the Buck = Equities Breakout!

The US Dollar is getting smoked here. Bullish TREND line support of the USD is now under siege – that support line for the USD Index = 85.26; we’re trading 85.27 now! The dominant Macro inverse correlation for 2009 remains USD vs. SP500. There is NO upside resistance now in the SP500 up to the 812 line. Short Sellers, beware of the Shark Line; there’s a pile of downside SP500 support built up down on that line at 759.

Keith R. McCullough
CEO & Chief Investment Officer


The death of Macau has been greatly exaggerated. Only the passage of time will solve the crazy credit comparisons (1H 2008) in the Rolling Chip business. However, the more profitable Mass Market segment has held up remarkably well despite the much discussed visa restrictions. The chart below details the YoY change in monthly mass market gaming revenues.

Not only has Mass Market visitation been more or less sustained, it appears to be accelerating over the past few weeks. The easy answer is the Chinese economy is doing fine, still growing, especially relative to the rest of the world, and the stock market is up 22% year to date. I love the capitalism delta. More importantly, we’ve received anecdotal evidence that the Central Government has relaxed the visa restrictions. Some are speculating that visas can be obtained in 15-30 days now. This is a pretty big positive for the Macau operators.

The momentum appears to be building. Beijing has a vested interest in providing a tailwind for the new Chief Executive. Mass Market visitation is potentially improving earlier than we thought. The Rolling Chip comparisons ease considerably in September.

It seems that most of the Macau properties have experienced positive visitation trends as of late which should show up in the March numbers. Two standouts have emerged: the Grand Lisboa owned by SJM and LVS’s Venetian Macau.

March should look better

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.52%
  • SHORT SIGNALS 78.67%

NKE Pre-Q: The Phantom Pre-announcement

NKE preannounced already, but people just don’t know it. Whether it takes the shape of a miss or a big guide-down I do not know. That restructuring announcement was Nike’s ‘get out of jail free’ card.

If there’s one company where I overwhelmingly get barraged with requests about my expectations into the quarter, it is Nike. (Note, over half of those come from investors that are not clients, so they do not get any form of response). This quarter, more than any I’ve seen in a while, is unique for Nike in that I really don’t think that the fundamentals matter a whole heck of a lot. Consider this…

Nike has not missed in 23 quarters – soooo good at managing expectations. I’d argue that it is the organization and incentive structure that does a good job in managing Senior management’s expectations rather than Sr Mgmt sandbagging.

Nonetheless…Nike also gives no EPS guidance, but usually gives enough pieces of the puzzle when it has visibility on its numbers. Not this time. The standard deviation in Nike’s quarterly estimates has been heading steadily higher (perhaps explained by the mayhem on Wall Street, but Nike’s trend is far higher than other companies) and this q is no exception.

But what I am often asked is “will the company preannounce if it is meaningfully off of the Street?” I usually have one answer, which is “Absolutely not.” But this time I’ll give the following answer… “They already did!” Whether it takes the shape of a miss, or a guide down I do not know. But when Nike came out and announced its restructuring and 1,400 person headcount cut, that was the company’s way of telling the organization, its customers, and The Street, that things have taken a dramatic turn. Anticipation of this is what kept me on the other side of this fundamentally and Keith short the stock several times from $65 down to the low $40s.

But the factor here that people are not baking in to the model is that this event will serve as Nike’s ‘get out of jail free’ card. It’s gotten to a point where it no longer beats on top line, FX, and Gross Margin, but will be relying on SG&A, FX hedges and maybe a lower tax rate.

If you were a CFO, and the rate at which your regional CFOs are beating plan is slowing (and starting to miss), you’re hearing really weak anecdotes are flowing in from the channel -- including bankruptcies, the rate at which you are growing organically is about to slow, FX is no longer your friend (see below), earnings visibility is not what it once was, and together with your CEO and Board the company recently announced a restructuring…what would you do? Most people would ensure that they’re investing in all the right initiatives today, that accruals are clean and appropriate, and that expectations are reset by the time we ultimately head out of this Great Recession.

Make no mistake -- I think Nike is proactively handling this situation, which is part of what makes it great. But it still does not help earnings for investors with a short duration.

Shark Line, Refreshed (SP500 Levels)

I re-ran the math for 11AM EST and come out with a Shark Line that’s 3 points lower than last night’s close. The Shark Line moves down to 759 (dotted white line), and underneath that line there is a strong base of support building (665-734, the green shaded water)…

Let me be clear, I am not trying to get cute with this Jaws metaphor. I am trying to help you manage risk. The last +15% of a short squeeze reminds us all that risk isn’t just managed on the downside. Given that the one thing I heard most from clients used to be “I don’t Trade like you do”, with each passing day I seem to be earning some respect that trading is the most proactive form of risk management one can employ in a Bear Market.

Importantly, overhead resistance within this Bear Market is formidable up at the intermediate TREND line of 829. From an immediate term TRADE perspective however, I now see upside to 804, and it could happen in relatively short order. Continued Technology M&A is a pending catalyst, and we just learned with IBM/JAVA this morning that the bid you see in Tech is real. In an environment where cost of capital is moving higher, the best way for mature companies to grow is to buy someone.

If the SP500 breaks down and closes below the Shark Line (759), those buying/covering (like I have been all morning) will drown to that 665-734 buying range. Shark hunting is not for the faint of heart.

Keith R. McCullough
CEO & Chief Investment Officer

GPS: One Big Circular Reference

SG&A cuts have gone from fat, to muscle, to bone. Inventory improvement is officially tapped. GPS must comp, but needs the talent (SG&A) to do so, as well as the inventory. Numbers are too high.

I think that there’s such a massive fundamental disconnect at GPS. How could a company comp down 28% over 4-years, while leveraging SG&A and sustaining gross margins? It all lies in cuts to SG&A and working capital. I’ll give it to GPS on working cap. They’ve brought down inventory to 70 days, which puts them in the top 10% of retailers as it relates to inventory management efficiency. But SG&A is scary. The company had already been losing design, marketing and merchandising talent BEFORE the double digit SG&A cuts of the past year. First GPS cut into fat, then 3 years ago it hit muscle, last year it struck bone, and now it is sawing away (sorry for the foul visual…).

What does all this mean? Well…as indicated in our SIGMA chart below, this company is in a precarious position. Sales have been consistently growing faster than inventories with positive margins, but inventories got out of whack last quarter. Now we’re at a point where I don’t believe inventories can come down anymore. What does that mean? Yes, for the first time in 5 years, Gap actually needs to comp. But the only way to comp is to 1) pump in the appropriate inventory that is 2) designed, merchandised and sourced by the tight list of people who actually have the qualifications to do this at a company that is structurally too large to be fast and accurate.

I don’t get it. I don’t see how Gap earns a buck this year. The consensus is at $1.14. In fact, without a massive reallocation of capital (to either SG&A or some capital project that I am not smart enough to think about now), I don’t see how Gap ever earns over $1 again (yes, earnings would need to come down before they can go up again).

Full disclosure: Here’s a trading callout from Keith that is a risk to being short.
Shorts not a huge factor driving this (less than 4% of float is short), but you might want to check the seq change in short interest base across the last 3-6-9 months… All insiders do at this company is sell obviously – but looks like the Fisher’s remain on a program.

All of the big holders were mutual funds and look to have yacked it on the lows – no one is ALLOWED to own a dog like this for this long … not one holder is north of 5% of the shares anymore other than the Fishers. This is actually a very positive factor if there’s any kind of a turn to call in this business; people wouldn’t/couldn’t afford to miss a stock with this kind of cap move higher, sustainably.


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