Staggeringly Quiet

“No one could remember when London had been so quiet.”

-Paul Reid


That’s what Paul Reid wrote about the French surrender to the Germans on June 22, 1940. It “staggered all of Britain. Britons began to realize that the way of life they had known and loved was vanishing.” (The Last Lion, pg 105)


And with the S&P Futures having a mini flash crash of -3.4% last night (1390 was the low) on the new “news” that our political overlords have no concept of real-time risk management, all was quiet.


Staggeringly quiet.


Back to the Global Macro Grind


People who wake up every day begging for and/or getting paid by more Big Government Intervention in what were our free-markets have no business whining about this today. They want a deal? This is part of the deal. So deal with it.


While there’s no doubt some in the #PoliticalMedia panicked last night, maybe freaking out is the only thing left that will drive ratings off 8 year lows. Who knows. The Rest of Us just sat back and watched the #PoliticalClass self-implode.


Context in considering market risk is always critical. Understand that both Asian and European equity markets were immediate-term TRADE overbought to begin with, so I wouldn’t consider Asia’s closing prices overnight and/or how Europe is trading this morning anything to freak-out about.



  1. China (Shanghai Composite) only gave back -0.69% of its recent rip
  2. Japan (Nikkei) was down -1% after being up +17% in the last month
  3. Singapore and South Korea were down -0.38% and -0.95%, respectively


  1. EuroStoxx50 is only down -0.59% this morning after going straight up since mid-November
  2. Germany (DAX) is -0.68% to 7619 (up +29.4% YTD and comfortably above its SEP 7451 closing high)
  3. Denmark (OMX Copenhagen) doesn’t care about any of this noise, UP +0.4% on the session

I know, who cares about Denmark? Let me assure you that the Danes don’t care about Captain Bailout America these days either. That’s the new world we are perpetuating – a very much polarized and protectionist one. Get used to it.


Global Fixed Income and Currency markets aren’t freaking-out like US Equity Futures traders either:

  1. US Treasury Yield (10yr) has literally moved 1 beep (basis point) in the last 24hrs (1.76% vs 1.77%)
  2. US Dollar Index is actually up +0.11% on the session to $79.37, making another higher long-term low
  3. EUR/USD only down 20 beeps to $1.32 showing no stress whatsoever

Spread risk and bond yields, globally, aren’t signaling much to me this morning; neither are commodities. Other than seeing a lot of bad jokes about Mayans on my Twitter stream, all I really see going on is a bunch of politically oriented people on TV looking emphatic on mute.


*Twitter and TV Viewer Note: when you are emphatic about everything, you emphasize nothing.


Where do we go from here?


You probably pick your favorite stock this morning and buy it on red. Don’t buy a Gold stock though. You’d think on an end-of-the-world morning like this Gold would actually go up. Nope.


Our intermediate-term strategy view remains the same as it has for the last month:

  1. Long Global Consumption Stocks (NKE had a great quarter last night – FDX acted well on earnings this week too)
  2. Short Commodities (we’re still short Oil and Energy related equities)
  3. Out of Fixed Income (we sold all of ours last Friday and might short bonds today if we get our price)

If someone in your workplace is running around like a chicken with their head cutoff this morning, do me a favor and tell them to relax and realize that the way of life we had during free-markets is vanishing. Shhh.


Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $105.99-110.65, $3.52-3.59, $79.01-79.71, $1.31-1.33, 1.70-1.85%, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Staggeringly Quiet - Chart of the Day


Staggeringly Quiet - Virtual Portfolio


We think investors buying BWLD in anticipation of the share price reaching the consensus twelve-month price target are likely to be disappointed.


Buffalo Wild Wings has been one of the more volatile restaurant stocks in 2012.  We believe that buyers of the company’s shares risk less-than-expected returns in 2013.  That the company is taking 6% of pricing as we near the end of the year is very concerning from the perspective of the consumer’s perception of the brand.  Stubbornly high chicken wing prices are forcing management’s hand and, if Sanderson Farm’s commentary from 12/18 is anything to go by, the company’s input costs could remain elevated in 2013. 


While we believe the stock is a decent short here and now, we would find it increasingly compelling if the price were to rise closer to $80.


BWLD PRICE TARGET NOT LIKELY - bwld price target



Notable Commentary from SAFM


“As many of you know, the Georgia Dock price is a good indicator of the supply and demand dynamics for products sold to retail grocery stores. The balance of supply and retail grocery demand has held relatively steady through most of the past three fiscal years. The Georgia Dock price needs to move higher still, however, to offset current grain costs.”


“In the past when wings got really truly hot and high, other products found themselves on to menus like boneless wings, boneless breast, chicken tenders. High prices will cure high prices. And I don't know what the ceiling is, but I am guessing that these restaurant owners will find something else put on the menu if they're not making margins. They might go to $2, but my guess is they won't stay there very long.”



Fundamental Outlook


The company’s top-line is likely to be a concern for the next couple of quarters.  We see two issues, one specific and one potential, facing the company over the next couple of quarters:

  1. The company taking 6% price could lead to a greater-than-anticipated slowdown in traffic
  2. Testing is ongoing of a strategy to sell wings by weight, not number, in several markets

We are cautious on BWLD’s ability to maintain the magnitude of its same-restaurant sales “Gap-to-Knapp” in 2013, particularly if the testing of serving wings by weight becomes the company’s system-wide policy. 


BWLD PRICE TARGET NOT LIKELY - bwld comps detail



Changes in the company’s cost of sales are mainly driven by fluctuations in spot wing prices.  Bone-in wings comprise 20% of the company’s basket.  Below is a table that we first published at the start of 2012 outlining the sensitivity of BWLD’s earnings per share to 10% of wing price inflation.  While boneless wings do offer some shelter from spot market price, since the company contracts boneless wings, the mix shift that the company has managed to bring about during prior bouts of inflation has not been substantial (3% increase in boneless mix in 2009).


BWLD PRICE TARGET NOT LIKELY - bwld cogs vs wing prics



Other operating expenses – Labor, Operating, and Occupancy – have been declining as a percentage of sales for some time.  Considering that comps are decelerating and, by these metrics, the company has become more efficient over the last couple of years, it could be a challenge to gain margin from these line items in FY13.  Management guided to higher labor costs, as a percentage of sales, in the fourth quarter but consensus is still modeling a year-over-year decline in labor costs as a percentage of sales.  









Howard Penney

Managing Director


Rory Green

Senior Analyst


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

Are Houses Like Potatoes?

This note was originally published at 8am on December 07, 2012 for Hedgeye subscribers.

Reflexivity. Reflexivity asserts that prices do in fact influence the fundamentals and that these newly-influenced set of fundamentals then proceed to change expectations, thus influencing prices; the process continues in a self-reinforcing pattern.
- Wikipedia


Last night we celebrated another great year, our fifth, at our firm’s annual holiday party. Not thinking ahead, I agreed two days ago to write this morning’s Early Look. Keith was proactively managing risk, as usual.


Housing has been in the news a lot recently. A few days ago, Corelogic reported that home prices had risen 6.3% in October vs. the prior year, the fastest rate of growth in a long time. What’s more, Corelogic provides an early look into the following month – something they’ve been doing for the last few months – that showed November’s growth is even stronger at +7.1%. Those are some serious numbers. It’s no longer just Wall Street taking notice. Main Street is starting to pay attention too.


Housing is reflexive. I would argue it’s also a Giffen good. Giffen goods are things people buy more of when the price rises. To economists, Giffen goods are a paradox, something that should not/cannot exist. In fact, at one point in time, the only Giffen good thought to have ever existed was potatoes in Ireland during the Great Irish Potato Famine. Economists later published papers on why this wasn’t a Giffen good after all.


Why would anyone buy more of something as the price rises? The short answer is because he or she expects the price to keep rising. Consider some empirical evidence from the housing market. In 1999, the median priced home in the U.S. cost $137,000. That same year, the Mortgage Bankers Association, or MBA, showed that demand for houses, as measured by their mortgage purchase applications index, stood at 276. Fast forward six years, and by 2005 the median priced U.S. home cost $218,000, an increase of 59%. Meanwhile, demand for homes had risen to 471 on the MBA index, an increase of 70%. Apparently, when houses cost 59% more, we choose to buy 70% more of them.


Fast forward another six years, to 2011, and median price had fallen to $165,000, a decline of 24%. Demand? Demand fell to 180, a drop of 62%. So, again, when houses cost 24% less, we bought 62% less of them. It’s pretty clear that housing is, at a most basic level, a Giffen good. Rising prices stoke greater demand, which fuels rising prices. That cycle, of course, works in reverse too.


So, whether it’s reflexive or a Giffen or a potato, it’s with this dynamic in mind that we’re hosting our 11am call this morning entitled “Could Housing’s Recovery Go Parabolic in 2013?” If you’d like to listen, email


Our contention is that housing’s positive momentum is accelerating. On the call we’ll explain the underappreciated role being played by falling rates, growing modifications, and the upside potential from credit easing. We’ll also be laying out our new home price models in the context of supply and demand across the three major markets: existing, new and distressed homes. Of course, we’ll also be flagging the stocks we see as major winners from this dynamic.


Taking a step back, it’s worth reminding investors why housing matters. My sector, Financials, is up 21.9% year-to-date. Bank of America is up 88% year-to-date and is trading at a new high for the year. While there are several reasons why, none is more important than the improvement we’ve seen in housing. Housing is still in the early stages of a secular recovery that will last for years. Similarly, Financials are in the early stages of their own recovery. 2012 has been a good year for both so far (after having endured five straight years of misery), and we expect more progress in 2013 fueled largely by housing.


Josh Steiner, CFA
Managing Director


Are Houses Like Potatoes? - potatoes core logic


Are Houses Like Potatoes? - Virtual Portfolio

NKE: Working for the Right Reasons

Takeaway: The TRADE, TREND and TAIL fundamentals are converging for $NKE to offer one of the better risk-adjusted returns in retail into 2013

This is a name that is working for the right reasons. While it might not make you rich at $100 (that’s pushback we get), the reality is that the TRADE, TREND and TAIL fundamentals are converging in a way for it to offer up one of the better risk-adjusted returns in retail into 2013. Nike is currently sitting at a 20x multiple on this year’s earnings, and when we look at the catalyst calendar and setup over the next two years, we can find no reason to justify multiple degradation.   The earnings acceleration to a 20% CAGR alone should set the stage. We’re building up to $7 in earnings 2-years out, which suggests a $140 stock, or around $120 in a year.


Along the way, you own one of the top ten brand names in the world and the clear leader of a duopoly in a GDP plus industry. Over our TAIL duration (3 years or less) we think you will start to see the benefit of unprecedented investment today to change the landscape of this industry. Our point can best be explained in an hour long conversation (or a soon-to-be released Black Book), but the crux rests in the convergence of new manufacturing technologies, mass customization, and digital proliferation of sport and commercially available product. This might not sound new to people who know the story, but we're convinced it is underappreciated from a strategic and modeling perspective. In the end it will keep Nike’s top line alive long past when the consensus thinks it will roll over due to perceived cyclical threats.


TREND (3 months or more): Over our intermediate-term TREND duration, two things should happen. 1) China should continue to stabilize and turn back up within two quarters. Keep in mind that it has been one of the biggest sentiment/stock obstacles, and China is Nike’s highest-margin region by a country mile. 2) Gross margin should turn decidedly positive after lagging for two years. These factors provide a massive cushion to the extent we see any slowdown in the US – though we don’t expect to see any growth in the US below 8% for the foreseeable future.


TRADE (3 weeks or less): From a near-term TRADE perspective, we’ve got the positive print showing such solid execution against a backdrop of such negative sentiment, and a stock split that takes effect on Monday the 24th.  While we hate to suggest that the latter helps, but it arguably helps the sentiment around accessibility to a retail investor over the near-term. The immediate-term SIGMA set-up is solid.


NKE: Working for the Right Reasons - 12 20 2012 9 37 35 PM


As for the quarter, here are some of the puts and takes…

  • The 2-year growth rate for US footwear is the highest in the history. The number ‘should have rolled’ according to the consensus. But it accelerated. Some will say that we’re just kicking the can down the road until revenue eventually decelerates. We call it execution. As a sidenote, Nike’s US footwear business alone grew in the quarter by nearly 3x the size of the entire revenue number UA printed for footwear in 3Q
  • US margins were up 272bps. Close outs are down and inventories are clean.
  • We like the blend of pricing vs ASP for footwear -- +3% and +4% respectively.
  • Comp store sales grew 18%. ‘Nuff said.
  • Running and hoops were both up over 20%. That’s solid. But women and action sports were down – that’s not what we want  to see as these are barometers for future growth. Yellow flag that one.
  • China revenue was -11% as the company continues to clean up its self inflicted black eye. While they continue to boast about how they can fix China because they’ve been in this position before, we’d ask “how did you get in this spot given that you’ve been here before? Nonetheless, futures in China at down half the rate of the revenue decline, which supports the trajectory that management suggests the business is on. Margins in China remain weak, but that’s a relative term given that they’re still clocking in at 32%.
  • In what might be a validation of the apocalyptic end of the Mayan calendar, Japan put up the highest 2-year growth rate in 13 quarters.
  • We do not, I repeat DO NOT, like the fact that Emerging Markets futures are only up 7%. That’s the sixth consecutive quarterly decline. Last we checked, Emerging Markets are supposed to grow. EM represents 14% of the company, and an greater proportion of its future. This is not a thesis killer for us, but is one of the issues we need more comfort with.

Overall, there will always be parts of a portfolio that need work. We think that when everything nets out with where Nike is today, it is a great place to be.

Italy’s Uneven Footing

Takeaway: Italy equities (EWI) look ripe for a correction as election indecision looms.

No Current RealTimeAlerts Positions in Europe

With a recent spate of negative Italian data we thought it important to update the macroeconomic imbalances and risks in Italy. Below is a levels chart of Italy’s FTSE MIB index that we think is ripe for a correction given the looming election uncertainty.


Italy’s Uneven Footing - 11. ftse mib index


As a long-standing member of the PIIGS, one of Italy’s most immediate threats is the upcoming election – including the possibility of a power vacuum alongside the transition away from the current technocratic government of PM Mario Monti (and therefore the reform measures passed during his term).  This could jeopardize the stance of its sovereign and banking ratings. 


Despite all the noise from former PM Silvio Berlusconi that he’ll make another run as a candidate and speculation around Monti putting his hat in for another term, what’s clear is that Berlusconi and his PDL are trailing badly in the opinion polls.  Per Luigi Bersani of the Democratic Party (PD) is the current front-runner and despite Berlusconi’s comeback barks we believe he realizes that he personally has no shot to be elected PM. Yet, because a coalition government will have to be formed, Berlusconi may be thinking that the continuity of a Monti victory could bode well for the country’s health and that more politicking could garner more support for his party.  While Berlusconi’s positioning and utterance may not be clear, expect the risk spotlight to turn up as elections are pushed forward (likely on February 17th or 24th) and for Berlusconi's political gravitas to be less than it was in the past.   


Just today the Italian Senate approved 2013 budget law, which was largely expected.  The bill will go to the Chamber of Deputies for final approval, likely tomorrow. Once the budget law is passed, we expect Monti to resign and the risks ahead of February’s election to heighten investor behavior.


Risk has largely abated across Europe (especially the periphery) since the summer and particular following Mario Draghi September ECB statement (9/6) to buy “unlimited” sovereign debt via the OMT program. In fact if we look at the period since the beginning of September 2012 Italy’s 10YR is down -24% to 4.42% and Sovereign 5YR CDS is down -42% to 269bps over this same period, including Bank CDS down an average -18%. Meanwhile, the broader Italian equity market (FTSE MIB), despite volatile swings is up +8.6%.


Taken together, we see risk in both a pullback in equities as heightening of risk alongside election indecision and the sovereign banking feedback loop (along with Spain) given its high debt load (at 120% of GDP). 


Below is an update of the fundamentals we track, most of which continue to show slow to depressed levels, that suggest a return to growth may be further out than consensus currently forecasts.


Growth Slowing - As the data from Reinhart and Rogoff shows, when a country’s sovereign debt load exceeds 90% (of GDP) growth is dramatically impaired. We think the market will continue to punish Italy via higher servicing costs. We expect this red line to continue down and to the right and the country to underperform Bloomberg consensus expectations for -0.70% GDP in 2013.


Italy’s Uneven Footing - 11. italy gdp


Underperforming Growth - A major leading indicator for growth is derived from PMI surveys. As the two charts below indicate, Manufacturing and Services PMIs are well under the Eurozone averages and have been under the 50 line that divides expansion (above) and contraction (below) since mid 2011.  


Italy’s Uneven Footing - 11. italy pmi services


Italy’s Uneven Footing - 11. italy pmi manu


Labor Cost Inefficiencies - A major factor behind Italy’s slower growth profile is stagnation in its productivity, witnessed by higher unit labor casts, while wages, despite declines, have yet to turn negative. 


Italy’s Uneven Footing - 11. italy labor costs


Economic Confidence Survey - Has trended down since 6/30/11.


Italy’s Uneven Footing - 11. italy confidence


Retail Sales - Negative for 8 of 10 quarters reported this year and accelerating its decline over recent months.


Italy’s Uneven Footing - 111. italy retail sales


Industrial Production – Slowing and underperforming, continued.  A European Commission paper reviewing Italy noted that stagnation in production is the key factor behind Italy’s loss of cost competitiveness since the euro adoption. 


Italy’s Uneven Footing - 11. italy industrial prod


New car registrations - Yet another metric we follow. Here again, no surprise, underperformance vs the EU average. 


Italy’s Uneven Footing - 11. italy car reg


Smashed Piggy Banks - The Italian household savings rate moved from a high of 17.8% in mid 2002 down to 8.1% as of Q3 2011. The chart shows that Italians leveraged their savings in the upturn and in the downturn. The tapping of savings in the last three years demonstrates to pay off debt and the resilience of the Italian consumer to maintain previous spending levels. 


Italy’s Uneven Footing - 11. italy savings rate


Unemployment Hooking - Another grave dynamic is the underemployment across Italian youths at 37%. While short of the 50% for Spanish youth, combine “a lost generation” with Italy’s demographic headwinds of an aging population (near oldest in Europe) and you have a cocktail that puts great pressure on social services, and the debt and deficit loads in the years ahead. 


Italy’s Uneven Footing - 11. italy unemply rate


Matthew Hedrick

Senior Analyst 


Early Look

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