“Do not suffer your good nature to say yes when you ought to say no.”
Raising a firm is something I struggle with sometimes. I endemically trust people who are on my team. I want to believe they’ll succeed. With time, I’m learning that saying yes to everyone’s individual wants isn’t the way to accomplish the team’s goals.
Wants versus needs – it’s an interesting discussion I often have with myself. Do I need to hire? Do I want to grow? Do I need to get bearish? Do I want to be right? Why not just let the market tell me what to do?
On that score, the aforementioned quote inspired me last night. It comes from Chapter 1, “The Early Years”, of Volcker – The Triumph of Persistence. It hung prominently in Paul Volcker’s father’s office, and was “burrowed into young Paul’s brain” (page 15).
Back to the Global Macro Grind…
From a behavioral perspective, yesterday was one of the many fascinating market days of 2013:
- On the open, the SP500 tested another fresh all-time high at 1570
- Into the close, the SP500 tested (and held) our immediate-term TRADE line of 1556 support
Did you chase the open (buy high)? Did you sell the close (sell low)? Or at both psychological pain points in the US equity market day did you Just Say No?
Selling on green and buying on red is a lot harder than it sounds. Sometimes I have to physically force myself to do the opposite of what I feel like I should do (I get up from my desk and go for a walk). For me at least, feeling anything about macro market moves is usually my first mistake. The second is not trusting my signal.
So, just say no buds – it’s ok, really (so is talking to yourself). Oh, and don’t forget to #timestamp all of those decisions so that you are accountable to every time your process answers, as my 3 yr old daughter asks, “yes or no?” Buy or sell?
The decisions I made yesterday were as follows:
- Sold 3 LONG positions on the open (OZM, FDX, and HOLX)
- Shorted 1 core short idea at 10:18AM (Basic Materials, XLB)
- Bought/Covered positions between 12:50PM and the close (CJES, EWM, IWM)
Now some will call that whatever they want to call that. I’m just calling it out as what I did. Whenever I do something, I consider the 2 big parts of our process (the Research View and the Risk Management Signal):
- Research View: on the margin, the ISM report released at 10AM EST was bearish (that’s why I sold FDX and shorted XLB)
- Quantitative Signal: both the SP500 and Russell2000 held immediate-term TRADE support (that’s why I bought IWM)
Within a 15 point (-0.7%) intraday move on a no-volume day (actually a big move considering how few and far between down moves in US stocks have been), you might just say that I said no to fear – and worked the top and bottom ends of my risk range, both ways.
Some call it trading. Others call it timing. Many call both trading and timing bad things – and for good reason. If I didn’t have a repeatable process to signal a probable risk range, I wouldn’t be risk managing intraday moves either.
No matter what I said yes or no to yesterday, now I have to deal with today:
- ASIA: mixed as Equity Indexes continues to make higher-lows and higher-highs; Yen overbought; Nikkei oversold.
- EUROPE: strong moves from important support levels for both the DAX and the FTSE on ok PMI data
- USA: US Dollar remains Strong Like Bull; 10yr Yield at low-end of our risk range; US Equity futures up
So, we’ll start the day with 13 LONGS and 8 SHORTS @Hedgeye. Two of those 8 SHORTS are Treasuries (TLT) and the Yen (FXY). And the question I have in my mind is why wasn’t I more aggressive getting longer?
It’s in my nature (no matter how bullish I am on US growth or stocks) to be relatively conservative in my net long positioning. But Mr Market doesn’t care about my nature. So I have to work on finding a way to just say no more to my natural instincts.
Our immediate-term Risk Ranges for Gold, Oil, US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $108.95-111.44, $82.53-83.38, 93.07-96.12, 1.83-1.94%, 12.14-14.34, 935-955, and 1, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – April 2, 2013
As we look at today's setup for the S&P 500, the range is 15 points or 0.33% downside to 1557 and 0.63% upside to 1572.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 1.60 from 1.59
- VIX closed at 13.58 1 day percent change of 6.93%
MACRO DATA POINTS (Bloomberg Estimates):
- 7:45am: ICSC weekly sales
- 8:55am: Johnson/Redbook weekly sale
- 9:45am: ISM New York, March (Prior: 58.8)
- 10am: Factory Orders, Feb., est. 2.9% (Prior: -2.0%)
- 10am: IBD/TIPP Eco Optimism, April, est. 45.5 (Prior: 42.2)
- 11am: Fed to buy $1.25b-$1.75b in 2036-2043 sector
- 11:30am: U.S. to sell 4W bills, $25b 52W bills
- 1pm: Fed’s Kocherlakota speaks in Grand Forks, N.D.
- 1:30pm: Fed’s Lockhart speaks in Birmingham, Ala.
- 4:30pm: API energy inventories
- 7:30pm: Fed’s Evans, Lacker speak in Richmond, Va.
- House, Senate not in session
- President Obama meets with Singapore’s Prime Minister Lee Hsien Loong
- IMF Managing Director Christine Lagarde speaks at World Resources Institute, 2:30pm
- Sec. of State John Kerry meets with South Korea’s Minister of Foreign Affairs and Trade Yun Byung Se, 3:30pm
WHAT TO WATCH
- Ford, GM, others report U.S. auto sales; SAAR may be 15.4m
- Euro-area unemployment rate rises to record 12%
- Dell CEO says business unit making progress amid LBO talks
- North Korea to restart nuclear reactor shut by disarmament deal
- Foreigners sell most Korean stocks since May on yen, tension
- Nasdaq accepts credit rating risk in quest to expand with ESpeed
- Vodafone rises; FT Alphaville blog reports AT&T/VZ working on joint takeover bid
- Obama said to consider Ray McGuire and Orin Kramer for Treasury
- Cyprus govt. officials are seeking easier bailout terms in talks with representatives of EU, IMF today
- Nuance jumps after Carl Icahn reports 9.3% passive stake
- Small-business insurance market from health law delayed a year
- Abe says BOJ may miss price target if global economy changes
- Cyprus seeks more time to meet budget targets in bailout talks
- Spain to alter 2013 GDP target to 1% contraction vs 0.5%: Reuters
- U.K. financial firms may hire 4,000 in 1H on growth outlook
- Bank-card delinquencies lowest in >18 yrs: ABA
- McCormick (MKC) 6:30am, $0.56
- Oxford Industries (OXM) 4pm, $0.70
- Global Payments (GPN) 4:01pm, $0.89
- Team Inc. (TISI) 4:01pm, $0.01
- G-III Apparel Group (GIII) aft-mkt $0.40
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- WTI Crude Little Changed as Survey Suggests U.S. Stockpiles Rose
- Raw-Material Bull Market Fading as Supply Expands: Commodities
- Rubber Poised for Third Surplus in 2013, Extending Price Slump
- Copper Swings in New York on Seven-Month Low and China Factories
- Vitol Group Starts Global Grain Trading From Singapore, Geneva
- Gold Swings as Investors Weigh Slowing Physical Demand, Crisis
- Crop Prices Rebound as Declines May Attract Consumers, Investors
- Commodity Bear Markets Expand on Rising Supplies of Corn, Silver
- Palm Oil Futures Gain as Decline to Three Month Low Spurs Buying
- Hong Kong as World-Beater Cut in London Metal by Mandarin Li
- Crude Stockpiles Surge to 22-Year High in Survey: Energy Markets
- Republican Born Roosevelt Digs Deep for Texas Oil Found With CO2
- Yen Makes Tokyo Rubber Better Bet Than China: Chart of the Day
- Rubber’s Slump Into Bear Market Draws Export Curbs From Thailand
The Hedgeye Macro Team
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One of gaming’s most hated acquisitions continues to look better and better
- For F2Q 2013, we estimate DoubleDown average daily active users (DAU) rose 9% QoQ to 1.59MM users; an acceleration from the recent trend
- The addition of foreign language sites was a likely driver behind accelerating growth
- We also expect to see an uptick in bookings per user and gross margin that may be above Street expectations
Takeaway: The latest econ data releases are very much in support of our theses. No change to either fundamental view for now.
- As anticipated, the first batch of MAR Chinese growth data accelerated sequentially, headlined by the NFLP Manufacturing PMI (11-month high) which accelerated to 50.9 from 50.1 vs. 51.2 est., and the HSBC gauge, which accelerated to 51.6 from 50.4 vs. 51.6 est. Underneath the hood, all is very well, as the New Orders and New Export Orders components of the official PMI both accelerated fairly meaningfully (+2.1 ppts MoM and +3.6 ppts MoM, respectively), while the Input Prices component ticked down to 50.6 from 55.5 (2nd consecutive month of deceleration on Strong Dollar = Strong CNY).
- That the Shanghai Composite Index closed down -0.1% on today’s positive growth figures speaks volumes to the growing concerns surrounding Chinese banking risks as regulatory overhang continues to weigh on the Chinese equity market (latest data point: 17 cities have recently implemented the latest round of property curbs). This fundamental tug-of-war between an improving cyclical outlook and an increasingly-convoluted structural outlook keeps us in a position where we’re inclined to let the market tell us what to do next.
- Turning to Japan, with the USD/JPY cross immediate-term TRADE oversold, we think the balance of risks warrants re-shorting the yen here ahead of the APR 3-4 BOJ meeting. Japan’s bleak cyclical trends (particularly the FEB CPI print, which was incrementally deflationary) warrant further easing – irrespective of the broader Abenomics agenda, which, on its own, has inflation expectations in Japan flat-out ripping.
- As highlighted by the confluence of recent survey data, expectations for Japanese economic growth continue to lag far behind Japanese inflation expectations, which, as we highlighted in our #Quadrill¥en slide deck, remains the biggest risk to the Japanese sovereign balance sheet, as well as to the P&L’s of Japanese equity beta-chasers – who remain safe for now, given our TREND and TAIL duration views on the Japanese yen from here. Recent trends in the JGB market (pancaked yield curve on speculation that the BOJ will extend the duration of its asset purchases) are in confirmation of our view.
CHINESE EQUITIES: IN “DO NOTHING” MODE FOR NOW
As anticipated, the first batch of MAR Chinese growth data accelerated sequentially, headlined by the NFLP Manufacturing PMI (11-month high) which accelerated to 50.9 from 50.1 vs. 51.2 est., and the HSBC gauge, which accelerated to 51.6 from 50.4 vs. 51.6 est. Underneath the hood, all is very well, as the New Orders and New Export Orders components of the official PMI both accelerated fairly meaningfully (+2.1 ppts MoM and +3.6 ppts MoM, respectively), while the Input Prices component ticked down to 50.6 from 55.5 (2nd consecutive month of deceleration on Strong Dollar = Strong CNY).
That the Shanghai Composite Index closed down -0.1% on these positive growth figures speaks volumes to the growing concerns surrounding Chinese banking risks as regulatory overhang continues to weigh on the Chinese equity market (latest data point: 17 cities have recently implemented the latest round of property curbs). This fundamental tug-of-war between an improving cyclical outlook and an increasingly-convoluted structural outlook keeps us in a position where we’re inclined to let the market tell us what to do next.
For more details on the latter of the aforementioned outlooks, as well as our latest risk management decision-tree, please refer to our 3/28 deep dive titled: “IS CHINA CAREENING TOWARDS FINANCIAL CRISIS?”. For reference, the Shanghai Composite Index is up +7.2% since we outlined the thesis back on 12/10 (vs. a regional median gain of +7.4%), but down -3.4% since we reiterated the view in our Best Ideas Call back on 2/27 (vs. a regional median gain of +1.7%). If it sounds at all like our patience is running thin on the long side here, it’s because that is precisely the case.
JAPANESE YEN: ALL EYES ON KURODA’S FIRST CUT
The USD has appreciated +20.3% vs. the JPY since we got bearish on the yen back on 9/27; it is rumored that George Soros has netted about $1 billion on shorting the yen since NOV – right around the time we reiterated our bear case on our 11/15 Best Ideas Call. Six months into currency combustion, the Japanese economy remains largely on the outside looking in from an economic growth perspective.
While sequentially improved, this morning’s highly disappointing 1Q Tankan Survey results only amplify the previous claim that Japanese officials simply aren’t getting it done in the growth department:
- Large Manufacturer Confidence: -8 from -12 vs. a Bloomberg consensus estimate of -7;
- Large Non-Manufacturer Confidence: 6 from 4 vs. a Bloomberg consensus estimate of 8;
- Large Manufacturer Outlook: -1 from -10 vs. a Bloomberg consensus estimate of 1; and
- Large Non-Manufacturer Outlook: 9 from 3 vs. a Bloomberg consensus estimate of 11.
In addition to these disappointing headline figures, large Japanese corporations from all industries plan to decrease capital spending by -2% in the fiscal year through MAR ‘14, compared with a revised +5.2% increase in the fiscal year ended MAR 31.
Ahead of the BOJ’s APR 3-4 meeting (Kuroda’s first as BOJ governor), sentiment in the forex market is still not bearish enough on the yen, as many believe expectations are so stretched in favor of monetary easing that Kuroda & Co. can only disappoint from here – an event that would be bullish for the yen in the short-term.
For example, Japan’s large manufacturers forecast on average that the yen will trade at 85.22 per dollar in the fiscal year through MAR ‘14, according to today’s Tankan Survey results. Bloomberg consensus forecasts call for the currency to be at 96.5 per dollar by the end of the same period.
All that being said, however, with the USD/JPY cross immediate-term TRADE oversold, we think the balance of risks warrants re-shorting the yen here ahead of the APR 3-4 BOJ meeting. Japan’s bleak cyclical trends (particularly the FEB CPI print, which was incrementally deflationary) warrant further easing – irrespective of the broader Abenomics agenda, which, on its own, has inflation expectations in Japan flat-out ripping.
To that last point, a recent BOJ survey showed that nearly three-quarters of Japanese households expect consumer prices to rise a year from now (74.2% in 1Q13 from 53% in 4Q12), the highest ratio in ~4.5 years!
As highlighted by the confluence of recent survey data, expectations for Japanese economic growth continue to lag far behind Japanese inflation expectations, which, as we highlighted in our #Quadrill¥en slide deck, remains the biggest risk to the Japanese sovereign balance sheet, as well as to the P&L’s of Japanese equity beta-chasers – who remain safe for now, given our TREND and TAIL duration views on the Japanese yen from here. Recent trends in the JGB market (pancaked yield curve on speculation that the BOJ will extend the duration of its asset purchases) are in confirmation of our view.
Our updated quantitative risk management levels for the USD/JPY cross are included in the chart below. Happy hunting out there, this week!
Takeaway: Here's a financial snapshot of UA's endorsement profile vs NKE. While NKE has the edge, there's oppty for UA if it plays its cards right.
Conclusion: The financial composition of athlete endorsement structure is more different in comparing Nike vs. UnderArmour than one might think. UnderArmour has wiggle room to be less conservative and take on more implied leverage with longer-dated sponsorship agreements as Nike’s long-dated deals outpace UA’s by over 200x. This could offer UA margin leverage on a TREND and TAIL duration, which it sorely needs. But NKE’s size, scale and balanced portfolio of deals is tough for anyone to compete with. This is not enough for us to get constructive on UA today, but it's something we'll watch develop.
Much like off-balance-sheet leases, companies are also required to disclose any contractual obligations as it relates to endorsements and/or sponsorships. In the case of Nike and UnderArmour, this is Athlete Endorsements – and the numbers are quite significant. These are minimum payments that are required regardless of whether or not the athlete performs or even plays. We’re given good disclosure here, even though they are rarely analyzed or discussed by most of Wall Street.
Here are some notable differences in the financial composition of Nike’s athlete endorsement portfolio versus what we see at UnderArmour.
- Size Matters: The obvious difference between the two is the raw size, with Nike logging in $3.8bn in sponsorships on its books. UnderArmour is $158mm. While you could argue that this is to be expected given the size gap between the two companies, NKE’s obligations net out to be 16% of current year sales, while UA is only 9%. Nike is 13x the size of UA, but it’s athlete endorsement pool is 25x the size of UA.
- Nike is More Balanced, But Opportunity for UA: It’s important to look at the duration of the obligated payments. As a percent of total, nearly 90% of UA’s payments are scheduled in less than 3-years. That compares to Nike at 61%. Conversely, 22% of Nike’s payments take place in years 4-5, and 16% are after year 5 (UA is 2%). We’re mixed on the implications here.
On one hand, Nike’s portfolio is balanced between short-term deals, longer-dated agreements that are soon coming to an end, and long-term agreements (ie the $628mm for NKE covers NFL, LeBron and the Tigers of the world). We like that.
On the flip side, NKE’s $628mm compares to UA’s long-term dollar tally of only $3mm. NKE’s long-term agreements are 209x UA’s. While this shows the opportunity for UA to sign more deals that are longer-dated (and presumably requiring lesser up-front investment), it shows how much powder Nike has even relative to a powerful competitor like UA. Deep pockets breed deeper pockets.
- Percent of Demand Creation/Marketing: Last year, 32% of Nike’s Demand Creation budget was ‘locked’ under these contractual agreements, and it’s noteworthy that in any given year over the past seven, the lowest Nike ever got was 27%. That’s incredibly stable. UnderArmour was remarkably close to NKE at 28% last year, but that number is up from 15% in 2006. Simply put, as UA matures, a greater proportion of its Marketing budget is being allocated to Athlete Endorsements as opposed to flat-out brand marketing. We’re ok with this, as it is a sign of a company maturing in this industry. But we’d rather not see it much higher (same goes for NKE).
- Note: The only way these minimum payments can cease to exist is if there is a breach of contract on the part of the athlete/team in question. That could be failure to participate in advertising/marketing campaigns, but that’s rare. More often, the factor comes down to an athlete breaking Morality clauses that are built into nearly all such agreements. When certain events are triggered, the Brand can look the other way (rare), sever the agreement (more frequent), or often in the case of Nike (Tiger, for example), the minimum obligation is materially lowered and the performance-based piece goes up materially.
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