NKE: In Rare State of Transition

Takeaway: Don't read this management change as a precursor to an EPS miss.

This note was originally published June 20, 2013 at 21:09 in Retail

Conclusion: Some things surprised us about Nike's announced management changes, other things did not.  Regardless, we don't think that it was timed such that there'd be a fall guy(s) for disappointing earnings to come next Thursday.   We think that the company will do its best to keep guidance for FYMay14 earnings grounded -- but that has absolutely nothing to do with what we saw after the close today. The bottom line is that most of the job changes make sense and have long-term organizational benefits -- but for the next quarter or two half a dozen key roles will be in transition.


NKE: In Rare State of Transition - nike 


Plain and simple, Charlie Denson (COO) is retiring. We all knew back in 2006 that this day would come. Back then Bill Perez was fired from the corner office and Mark Parker got the nod to take the CEO role over Denson -- who was then his equal. Denson is 57 and Parker is 56 -- they're both still young, and Parker isn't going anywhere soon.  Denson can't move any higher up the org chart.  He's sticking around until January 2014 -- hardly a time frame for an executive who's running for the door (or being pushed out of it). The press release says Parker is sad to see him go, and we think it's genuine.


We're pleased to see that there are no changes to the Finance organization -- notably Don Blair or his team. With Denson transitioning out, we think that Don Blair's stock inside the company will rise given Don's ability to lend expertise to a new incoming COO.  That said, it bugs us to see that Gary DeStefano is retiring. DeStefano is 54 years old, and has been at Nike for 31 years in too many roles to list. He's currently President of Global Operations, and will only be at the company for another five weeks.  Last we checked, that's a pretty important role.  The good news is that Denson will still be there to oversee the team while replacements are groomed. But out of the whole management change, if there was one part that we'd point to as being  potentially disruptive, this would be it.


One thing that was put in place at Nike over the past few years is that all employees that have managerial responsibilities have several people identified in their HR file who could easily step into their role in the event that they move on.  What this means is that if there is one higher-profile departure, then it sets off a domino-effect of other movement inside the organization.   Look at past press releases. Try to find an example where only one person leaves or moves to a different role.  You can't find it.


Another thing that works for Nike is that the company is not afraid to move its employees around the organization into and around different disciplines. Take for example Eric Sprunk (note: Wall Street universally loves the guy) who started his career at Price Waterhouse, and then after joining Nike in 1994 as Finance Director for the Americas, then Finance Director of Europe, Regional GM of Europe Footwear, GM Global Footwear, VP Global Product, EVP Merchandising and Product, and now COO. We could follow a similar track for almost all of the more successful Nike executives. 


In the end, this is all consistent with how we expect Nike to run it's business long-term, and it's what makes it so successful at what it does. We'll keep a closer eye on a few of these areas that are in transition, but over our 15-years covering the company have never been given reason to doubt the company's ability to manage through similar leadership changes without coming out on top.

Morning Reads on Our Radar Screen

Takeaway: A quick look at top stories on Hedgeye's radar screen.

Keith McCullough – CEO

Pushed to Limit, James and Miami Repeat as N.B.A. Champions (via New York Times)

Ford’s CEO Calls Japan Currency Manipulator Amid Weaker Yen (via Bloomberg)

Brazil unrest: 'Million' join protests in 100 cities (via BBC)


Morning Reads on Our Radar Screen - reading

Kevin Kaiser – Energy

Hess, Newfield launch sale of $3 billion of Asian assets (via Reuters)


Josh Steiner – Financials

U.S. Weighs Doubling Leverage Standard for Biggest Banks (via Bloomberg)


Brian McGough – Retail

Survey Says: 60% of Bangladesh Factories Could Collapse (via Sourcing Journal Online)

Nike’s Second in Command to Retire Amid Management Shift (via Bloomberg)


Matt Hedrick - Macro

EU to decide who pays when banks fail (via Reuters)


Jonathan Casteleyn – Financials

Morgan Stanley Receives Approval to Purchase Smith Barney (via Bloomberg)

Today Matters. A Lot.

Client Talking Points


Away from Japan, the bounce wasn’t even a bounce – Weimar Nikkei +1.66%, but still closed inside of my 13,696 TREND line of resistance. The rest of Asia acted horribly. KOSPI -1.5% is clean cut broken and the more EM looking indices (Indonesia, Philippines) down -1.6 and -2.3%. Asian #GrowthSlowing happening here at an accelerating rate #EmergingOutflows.


The only good news this week? The US Dollar Index has recovered TREND support of $81.11. (The upside down of that is YEN back over 96.18 TREND support vs USD). Bottom line: If there’s one quote - just one - that I was allowed to get live in a dark room to make decisions, this one would be it. It’s been triggering everything else. #CorrelationRisk 


After banging the top end of my immediate-term 2.24-2.46% risk range yesterday, the 10-year yield backs off to 2.38% here. But this thing is a beast. 0% asset allocation to Treasuries is the obvious call. Where to re-short bonds will be an important exercise here on the bounce today too. 

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Financials sector head Josh Steiner is the Street’s head bull on residential mortgage originator/servicer Nationstar, projecting $9 in earnings for the company in 2014.  This is well above the company’s own guidance range, which tops out at around $7.50. NSM had a successful start to the year as it won servicing bids on substantial mortgage portfolios.  They also reported significant increases in their profit margins on those portfolios, and double-digit increases in their own originations.  Housing prices are ramping significantly higher, as Steiner predicted, as demand continues to exceed supply in both new and existing homes.  Steiner says this quality mortgage company could ride the crest of a sustained wave of sector improvement.


Gaming, Leisure & Lodging sector head Todd Jordan says Melco International Entertainment stands to benefit from a major new European casino rollout.  An MPEL controlling entity, Melco International Development, is eyeing participation in a US$1 billion gaming project in Barcelona.  The new project, to be called “BCN World,” will start with a single resort with 1,100 hotel beds, a casino, and a theater.  Longer term, the objective is for BCN World to have six resorts.  The first property is scheduled to open for business in 2016. 


WWW is one of the best managed and most consistent companies in retail. We’re rarely fans of acquisitions, but the recent addition of Sperry, Saucony, Keds and Stride Rite (known as PLG) gives WWW a multi-year platform from which to grow. We think that the prevailing bearish view is very backward looking and leaves out a big piece of the WWW story, which is that integration of these brands into the WWW portfolio will allow the former PLG group to achieve what it could not under its former owner (most notably – international growth, and leverage a more diverse selling infrastructure in the US). Furthermore it will grow without needing to add the capital we’d otherwise expect as a stand-alone company – especially given WWW’s consolidation from four divisions into three -- which improves asset turns and financial returns.

Three for the Road


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"The truth is, I've never fooled anyone. I've let men sometimes fool themselves" - Marilyn Monroe


Among smartphone owners age 18-44, making phone calls accounts for only 16% of the total time spent with their devices, whereas the remaining 84% of time is spent texting and interacting with email and social networks. (Source:Marketingprofs)

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TODAY’S S&P 500 SET-UP – June 21, 2013

As we look at today's setup for the S&P 500, the range is 46 points or 0.33% downside to 1583 and 2.57% upside to 1629.                 










  • YIELD CURVE: 2.07 from 2.09
  • VIX closed at 20.49 1 day percent change of 23.14%

MACRO DATA POINTS (Bloomberg Estimates):

  • 11am: Fed to buy $1.25b-$1.75b notes in 2036-2043 sector
  • 1pm: Baker Hughes rig count


    • President Obama to announce Jim Comey as pick for FBI director
    • 9am: Natl Housing Conf. holds symposium on neighborhoods, household recovery from housing crisis; HUD Sec. Shaun Donovan delivers keynote remarks
    • 9am: Transportation Undersec. for Policy Polly Trottenberg, Deputy Energy Sec. Daniel Poneman participate in discussion of IEA report, “Redrawing the Energy-Climate Map.”
    • 1pm: Vice President Joe Biden speaks at U.S. Conf. of Mayors
    • 3pm: Senate Homeland Security and Governmental Affairs Cmte holds hearing on curbing prescription drug abuse in Medicare


  • Oracle 4Q adj. rev. misses; co. applies to list on NYSE
  • News Corp. publishing spinoff to join S&P 500
  • U.S. said to consider doubling leverage standard for big banks
  • Apple wins suit against Samsung in Japan on screen effects
  • Tesla adding model S battery swap for faster refuels, credit
  • CME raises gold margins as prices fall to lowest since 2010
  • Nike’s second-in-command to retire amid management overhaul
  • ADM in talks on sale of cocoa ops after margins squeezed
  • United 787 to Houston diverts to Newark on low oil alert
  • Endo Health unit pays $54.5m in vaginal mesh settlement
  • CBRE plans to invest in Chinese offices even as rents slow
  • U.S. Supreme Ct, EU Summit, Wimbledon: Wk Ahead June 22-29


    • Darden Restaurants (DRI) 7am, $1.04
    • CarMax (KMX) 7:35am, $0.58


  • Copper Rises as Aluminum Nears Longest Losing Streak Since 1987
  • Gold Trade Most Bearish Since ’10 as Fed Spurs Drop: Commodities
  • WTI Crude Trims Weekly Drop After Biggest Slump in Seven Months
  • Gold Rebounds in New York After Slumping to Cheapest Since 2010
  • India Approves Wheat, Rice Sale From Inventories to Curb Prices
  • Anil Ambani’s Reliance Halts Gold Sales in India to Cut Imports
  • Rebar Rises on Optimism Government Policies May Boost Demand
  • Ichimoku Beats Copper Charts Over Five Years: Technical Analysis
  • Arabica Coffee Rebounds After Nearing a 4-Year Low; Sugar Rises
  • Rajoy Targets Endesa to EDP’s Revenue to Cut Spain Debt: Energy
  • HKEx to Sign MOU With Bank of China on RMB Commodity Contracts
  • Anemic Growth Pressures Metal Prices and Capex Plans: Bear Case
  • ADM in Talks on Sale of Cocoa Operations After Margins Squeezed
  • CME Raises Margins for Gold as Prices Fall to Lowest Since 2010






















The Hedgeye Macro Team











June 21, 2013

June 21, 2013 - 20




June 21, 2013 - 10yr

June 21, 2013 - spx

June 21, 2013 - VIX

June 21, 2013 - dxy

June 21, 2013 - euro






June 21, 2013 - nik

June 21, 2013 - dax

June 21, 2013 - yen

June 21, 2013 - oil

June 21, 2013 - natgas

June 21, 2013 - gold 

The Paradox of Weather

This note was originally published at 8am on June 07, 2013 for Hedgeye subscribers.

“And when it rains on your parade, look up rather than down.  Without the rain, there would be no rainbow.”

-Gilbert K. Chesterton


It is a rainy day in the Northeast.  And rain can be depressing if we let it get to us.  The point that Chesterton makes above though is spot on.  Without the disruption of rain, there would ultimately be no rainbow and subsequently the hope of a pot of gold. 


The idea that we have to suffer through bad times to get to good times is of course a bit of a paradox.  To Chesterton, who is often referred to as the “prince of paradox” this was fine.  After all, he was an orthodox Christian who had friendly enemies.   (He was also 6’4, wore a cape, and carried around a swordstick in his hand.)


In mathematical terms, we would probably characterize this concept of bad weather becoming good as reversion to the mean.  Due to mathematical impossibilities, no price goes up forever and no price goes down forever.  In the same vein, rain doesn’t last forever and when it stops the weather is typically very nice.  Unfortunately for those hoping for good weather, the forecast is for showers through Tuesday of next week.  But as Longfellow said:


“The best thing one can do when it’s raining is to let it rain.”


For the last week or so, the U.S. equity market has been raining on our growth is accelerating parade.  So is this a temporary rainy spell and will the sunshine of a positive economic growth return shortly? Well, we certainly still believe this to be the case.


We had a good email discussion with one of our subscribers yesterday who asked us about an assertion Keith made that employment is continuing to improve.  The distinction between our view and the view of much of consensus is that we believe that seasonally adjusting the employment number distorts the data series.   Unfortunately for us, the market continues to cue off the seasonally adjusted number and those appear to be stagnating.


The impact over the last four years is that the seasonal adjustments have created a tailwind from September to February and a headwind from March through August. This is highlighted in the first chart below.  This “seasonally adjusted” slowdown in employment has also been a headwind for the equity market for the last few years. Nonetheless, even on a seasonally adjusted basis, as highlighted by the purple line in the first chart, employment is decelerating at a slower pace than in the prior four years.


More instructive though is the second chart below, which highlights rolling initial unemployment claims that are non-seasonally adjusted.  The trend here is clear, which is that employment is improving and somewhat decisively so.  To the extent that the market continues to focus on the seasonally adjusted series, though, we are likely to have a few more months of employment rain.  On that front, the May employment report is at 830am, so be wary as we are in the season of employment rain!


We would be remiss if we didn’t touch on Asia this morning where the storm clouds are creating a down pour on the global macro markets.  For those that chased Japan into its Abenomic highs, they are now quite literally having a mother of a time.  Specifically, the MOTHERS index closed down -11.5% over night and is now down -38% from its highs.  (This index holds smaller companies so is naturally more volatile.)


The driver of this mother of a correction in Japan was the strength in the Yen versus the dollar. From our purview, the break through the 99 barrier seemingly triggered a massive stop loss program and, as they say, when it rains, it pours.   As a result, the Yen / Dollar went from 99 to 96 in a straight line yesterday.  (Some have speculated that one catalyst may have been a leaking of today’s jobs number, but who are we to distrust the government . . .!)


As it relates to the Yen, which remains one of our Best Ideas on the short side, we still think that relative monetary policy will inform the direction of the currency.   As my colleague Darius Dale emphasized yesterday in a note to subscribers, the BOJ is already committed to monetizing ¥132 trillion through EOY ’14 (27.7% of 2012 nominal GDP) vs. the Fed’s $2.04 trillion (13% of 2012 nominal GDP) over the same time period – assuming the Fed continues at the current pace of $85 billion per month through EOY ’14 (an unlikely scenario in our opinion).  So despite yesterday’s correction in the Yen, we think the structural bear case remains.


One important highlight in the recent action in U.S. equities is that our risk range on the SP500 has widened to 1,607 – 1,669.  This isn’t terribly surprising given that volatility, as measured by the VIX, is up about 30% in the last month.  For those that actively hedge or trade their portfolio, all this really means is that you need a bigger umbrella in the short term!  Or as the popular band Blind Melon sings, “No Rain.”


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1361-1424, $100.58-104.73, $81.34-82.46, 95.66-103.34, 2.02-2.22%, 13.37-17.91, and 1607-1669, respectively.


Keep your head up and stick on the ice,


Daryl G. Jones

Economic Weatherman


The Paradox of Weather - Chart of the Day


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