TODAY’S S&P 500 SET-UP – March 22, 2013

As we look at today's setup for the S&P 500, the range is 23 points or 0.25% downside to 1542 and 1.24% upside to 1565.        










  • YIELD CURVE: 1.67 from 1.67
  • VIX  closed at 13.99 1 day percent change of 10.42%

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: Fed to purchase $3b-$3.75b notes 2018-2020 range
  • 12pm: Revisions to Fed’s industrial production data
  • 1pm: Baker Hughes rig count


    • Obama to meet w/ King Abdullah II of Jordan
    • 7:30am: Fed Gov. Sarah Bloom Raskin, CFPB Director Richard Cordray, FDIC Chairman Martin Gruenberg speak at Natl Community Reinvestment Coalition conf.


  • BlackBerry Z10’s U.S. debut marks biggest test of comeback
  • Dell go-shop period for other offers expires today
  • FCC Chairman Julius Genachowski said to be leaving agency
  • Cyprus lawmakers to debate bailout bill as deadline looms
  • Euro area said to weigh closing Cyprus banks, asset freeze
  • Boeing faulted by 787 investigators for battery fix comments
  • Samsung said to be in talks to sell Liquavista to Amazon
  • Sharp extends deadline for 2nd Qualcomm payment to June 28
  • Citigroup says pay plan holders rejected helped keep Corbat
  • Life sale said to shift to strategies; some buyout firms exit
  • German business confidence unexpectedly drops from 10-mo. high
  • Australia probes pricing by Apple, other tech cos.
  • Goldman Sachs raises U.S., Japan growth forecasts
  • Deutsche Bank, Goldman miss $129m fee in Evonik IPO snub
  • U.S. Spending, Supreme Court, BRICS, AMR: Wk Ahead March 23-30


    • Tiffany (TIF) 6:59am, $1.36
    • Stella-Jones (SJ CN) 7am, C$0.93
    • Darden Restaurants (DRI) 7am, $1.01


  • Brent Crude Set for Second Weekly Drop to Shrink Premium to WTI
  • Gold Seen Extending Rebound as Cyprus Revives Bulls: Commodities
  • Biggest Crisis Since 2008 Looms for South African Mines: Energy
  • Gold Falls From 3-Week High as ETP Drop Overshadows Cyprus Woes
  • Palm Oil Heads for Weekly Gain as Inventories Seen Declining
  • Industrial Metals Advance as Economies in U.S., China Improve
  • Rubber Declines for Second Week on Yen, Europe Debt Concerns
  • China Soybean Imports Seen Lower Than USDA Forecast Amid Delays
  • Copper Fees Climb in Shanghai as Metal Seen Moving to Malaysia
  • Rebar Declines as Demand Seen Curbed by Slowing Chinese Economy
  • Diesel Best Returns in Two Years Waning on China: Energy Markets
  • Brazil Gold Allure Puts Australia’s Beadell in Play: Real M&A
  • Traders Cut Paulson Gold Favorite on Liquidity: Chart of the Day
  • Mistry Sees Palm Rally Through May on Ringgit, Reserves Drop






















The Hedgeye Macro Team










Renaissance Men

This note was originally published at 8am on March 08, 2013 for Hedgeye subscribers.

“The dramatic modernization of the Asian economies ranks alongside the Renaissance and the Industrial revolution as one of the most important developments in economic history.”

-Larry Summers


Candidly, over time I have found myself disagreeing with a lot of what Larry Summers has said publicly. That said, the above quote definitely resonates with me.  As I touched on earlier this week, the story of development in Asia over the last twenty years, and in particular in China, is really unprecedented in economic history.


In North America over the last few decades the Renaissance Men, for lack of a better word, have been the private equity firms and hedge funds partners that have generated outsized returns and been paid handsomely.  Like any Renaissance, though, this one too will end.  This end is evidenced by some recent studies that highlight hedge funds returns are correlated to the SP500 with a more than 0.9 r-squared. If true, this renaissance may be ending sooner than many expect.


With such a tight R-squared, an emerging risk is actually how much each hedge fund owns of a particular stock.  Many quantitative managers have actually gone on to categorize this as “hedge fund risk”.  In effect, this equates to the amount of stock outstanding that is in the hands of a series of hedge fund managers.  So if a lot of the stock is held with hedge fund managers, then the hedge fund risk is high.


So speaking of Renaissance men, Hedgeye has a few, but perhaps the most legitimate one is our own Matt Hedrick, who covers European equities.   Matt hits our internal team with an update on Europe every morning and today his key points were limited.  This is actually positive because what it means is there is a not a lot going on in European and her sovereign debt crisis.


In fact, in the Chart of the Day we highlight this by showing Spanish 2 and 10 year yields over the last year.  The fact is that credit risk in Europe has been steadily declining.  As the chart shows, Spanish yields are well of their peak, but not only that, they are also below the levels of a year ago.  The key take-away from this is that while Europe sill matters, it only matters to a point as European credit risk, broadly, has improved.


With peripheral yields improving, we are also seeing an improvement in capital flowing back to certain countries. 

Specifically, in Italy private sector deposits were up 7.7% year-over-year in the last month.  While this is not a number that is going gangbusters per se, what it does show is that capital is coming back to the certain at-risk sovereigns in the Euro-zone.  This ultimately is a positive for broader credit risk in the EU.


On the flip side, some of the European data was less than positive night-over-night.  For instance, German industrial production declined -1.5% from last year.  This is an acceleration from December, which declined -0.5%.  Are these freak out type numbers? No, but they are indicative of a European economy that continues to struggle in its recovery.


I often quote my colleague and Hedgeye Financials Sector Head Josh Steiner in the Early Look.  Once again I want to highlight a big call he made yesterday in a note titled, “BAC, C, MS - LONG THE BIG CAP BETA RENORMALIZATION TRADE”.  As Josh wrote:


“There’s a paradox in global U.S. banks right now, and that is that they hold more capital today than they’ve held in a very long time. We show this in a chart below, which looks at Bank of America. The red line shows BofA’s tangible equity ratio going back ten years. You can see on the right hand y-axis that capital fell steadily from the high fives in 2003 to a low of 3% in the belly of the crisis and has since risen to around 7%. Capital ratios are much higher on a regulatory basis, but we like tangible equity for its simplicity – in other words, unlike risk-weighted capital measures, it’s more difficult for banks to manipulate this ratio in their favor. The point is that capital levels are very high today and, in fact, are still headed still higher for the foreseeable future (we'll know how much more after the close). The second line on this chart shows Bank of America’s rolling one year beta going back ten years. The takeaway here is that it has risen from its tight range around 0.8 from 2003 through 2007 to around 2 today (1.93 as of this morning). Capital is the inverse of leverage, and leverage is risk. High capital equates to low risk. Now let’s use beta as our proxy for cost of capital, and by the transitive property we find that the the market is charging the highest cost of capital at a time when the risk is, in fact, lowest. This is clearly paradoxical, and a dynamic we don’t think will last.”


So to summarize:  capital ratios for large U.S. banks are improving and these stocks are poised to continue to lead the U.S. equity rally.  While I enjoy having a few drinks with my colleague Josh, I’m not sure he (or me for that matter) is a Renaissance man, but what he is definitely is very accurate in terms of his view of the U.S. banking system.  If you’d like more of his thoughts, please email


As you all head into the weekend, I wanted to leave you with one last quote, which is related to a quote from the Early Look earlier this week:


“Marxism is like a classical building that followed the Renaissance; beautiful in its way, but incapable of growth.”




Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1559-1585, $109.07-111.73, $81.98-82.54, 92.11-95.81, 1.94-2.04%, 11.67-14.91, and 1519-1558, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Renaissance Men - zz. chart des tages


Renaissance Men - zz. vp


The Macau Metro Monitor, March 22, 2013




Attributed to Lunar New Year, visitor arrivals increased by 11.5% YoY to 2,376,840.  Mainland visitors totaled 1,508,599 (+17.4% YoY) with 754,692 traveling to Macau under the Individual Visit Scheme. The average length of stay of visitors stood at 0.9 day.





LVS says it “expects to apply” to the Macau government for an extension of the May 2014 deadline it was set by the government for completing Sands Cotai Central casino resort on Cotai.  This will be the third time it has asked for more time for its Cotai project.  Sands included the deadline news in its 2012 annual report published yesterday.

The government originally gave the company a May 2014 deadline – 48 months from the date the relevant Cotai land concession became effective – to complete Sands Cotai Central.  The property is expected to cost at least US$4.2 billion (MOP33.58 billion) when finished.



MGM China’s CEO Grant Bowie expects Macau’s 2013 VIP market to grow by between 8-10%.  Bowie forecasts mass-market casino revenue to grow in the “mid to high teens” on a percentage basis.  He added that March casino revenue is “pretty solid”.

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NKE: 3 for 3 in 3Q

Takeaway: Nike delivered on everything we needed to see to keep pounding the table, and then some.

There are three things we were looking for in Nike’s quarter; proof that 1) Nike is gaining share/driving consumer demand across its portfolio, 2) Gross Margins are improving at a rate well ahead of consensus expectations, and 3) that it is achieving these things with disproportionately less capital invested in its business (ie driving returns higher).  


Well, Nike showed us every one of these, topped our EPS estimated by a penny, and blew out the Street by $0.06ps. No changes to our above-consensus EPS estimates our thesis. Nike remains a top pick.


Some important points:

North America En Fuego. As it relates to demand, we saw North America sales up 18%, which was on top of a 17% growth rate last year. Importantly, futures were up 11% despite being up at a colossal rate of 22% this quarter last year. Think about it like this -- try to find another company with 45% share in its category that is growing its top line at a mid-teens rate while improving margins and lessening capital intensity along the way. Let us know what you find, we think you’ll come up dry.


China has definitely bottomed. Don’t let management’s caution fool you. They specifically made it a point to keep estimates grounded and said that that they still have a lot of wood to chop. But futures going from -6% and -5% over the past two quarters to +4% in 3Q is proof positive that this business has at least found bottom, and is likely trending higher once again.


Inventories still improving – driving better margins. Though pricing and easing raw materials costs helped gross margins, the spread between inventory and sales growth is getting better and will continue to drive gross margins higher. This is probably best evidenced by our SIGMA chart, where it shows Nike making a big move into the upper right quadrant of this analysis. Over time, triangulating margins with capital efficiency explains away 92% of stock moves in retail. Translation – it matters.


NKE: 3 for 3 in 3Q - nkeSIGMA


We think that the spread between inventories and margins will continue to diverge well into FY14

NKE: 3 for 3 in 3Q - nkegm




Here’s our previously-published comments on our expectations for 3Q.


NKE: Ahead of the Print

We think that the Q is in good shape, but if there are any fireworks we’re confident enough in our thesis to support the name.


Conclusion: Our analysis suggests that Nike’s quarter is in good shape. But let’s face it, Nike always manages to light off a firework or two. If that happens to be case on Thursday, we’re confident enough in our underlying thesis that we’d support any weakness.


Will the quarter be a blowout? Not exactly. We’re modeling $0.72 vs the Street at $0.67. Nice upside -- but not huge.  We’re about in line with the Street on the top line at about 11%, but we’re 50bp higher on the gross margin line. We think that’s fair given the easing product costs flowing through the P&L as well as 2Q ending with the most favorable inventory position in nine quarters.


Futures: As it relates to futures, bears are calling me with the expected ‘futures are decelerating’ concerns.  The company is going against a 22% North American futures number in this quarter, and +18% globally. It doesn’t take a genius to figure out that this is a ridiculously tough quarter to comp. On a 2-year run rate, a 7% North American or 5% Global futures number suggests an even underlying trend. We think Nike comes in 2-3 points above those levels. On a go-forward basis, keep in mind that after this quarter, we started to see China drop off precipitously. Beginning next quarter, we expect any slowdown in growth in North America to be offset by a rebound in China and an uptick in Western Europe (NKE is about to anniversary the latest downturn there, and FL recently noted a stabilization in Europe).


Sentiment is Flat-Out Bad: Lastly, we need to acknowledge sentiment and valuation. We agree that the stock isn’t cheap at 17x earnings. But let’s not forget that sentiment on Nike remains quite bad. Our sentiment monitor, which is based on both sell-side recommendations, short interest and insider trading activity, suggests that Nike is more hated today than almost any time over the past 10-years.


NKE: 3 for 3 in 3Q - NKE sentiment

ADM - Looks Like Ethanol Has Turned More Quickly Than Anticipated

ADM's bioproducts segment (ethanol) has been an albatross for the company in recent quarters - lack of corn and the price of corn have seen ethanol margins hover at or below breakeven.  Looking at consensus, it appears that there is no improvement expected until 2H calendar '13 for the company.  However, examining the trends in cash ethanol margins on Bloomberg as a proxy, it appears that the profit per gallon has moved up significantly in recent weeks and is now decidedly positive.  In the past, we have found the cash ethanol margins to be directionally useful in regard to determining segment profitability, and we are encouraged by recent trends.


At current levels and with weather semi-cooperative, we continue to see ADM as an inexpensive option on the corn crop in the U.S. in coming months.


ADM - Looks Like Ethanol Has Turned More Quickly Than Anticipated - Ethanol Profitability


ADM - Looks Like Ethanol Has Turned More Quickly Than Anticipated - ADM price to book


Call with questions,




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst 

Mining & Construction Equipment Call Invitation

Takeaway: Please join us March 27th at 11AM for our Mining & Construction black book call.

Mining & Construction Equipment Call Invitation - Picture2



The Hedgeye Industrials Team, led by Jay Van Sciver, will be hosting a black book conference call on Wednesday, March 27th at 11:00am EST entitled "Mining & Construction: Running Just To Stand Still." Jay will be highlighting the emerging opportunities in the mining and construction space as well as detailing bearish aspects of commodity markets, including production and demand data.




  • Examine the causes and sustainability of the recent moves in mining product prices
  • Update CAT thesis and data from Conference Call held September 14, 2012  
  • Update data and provide outlook for mining capital spending
  • Characteristics of historical capital investment cycles
  • A look at Global Construction Equipment market
  • Construction equipment demand trends
  • Industry structure analysis for Construction Equipment & Mining Equipment
  • Competitive entry, technological developments and other changes to the industry structures
  • Valuation of key competitors under different scenarios



  • CAT
  • JOY
  • TEX
  • OSK
  • MTW
  • GE 
  • Sandvik (SAND SS) 
  • Komatsu (KMTUY)
  • Finning (FTT CN)
  • Toromont (TIH CN)
  • Hitachi Construction (6305 JP)
  • Atlas Copco (ATCOA SS)


Please email to obtain the dial-in information for this call and a copy of the presentation, or to learn more about our research.

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