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TODAY’S S&P 500 SET-UP – July 3, 2013

As we look at today's setup for the S&P 500, the range is 28 points or 0.93% downside to 1599 and 0.80% upside to 1627.      










  • YIELD CURVE: 2.10 from 2.12
  • VIX closed at 16.44 1 day percent change of 0.43%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, June 28
  • 7:30am: Challenger Job Cuts, June (prior -41.2%)
  • 7:30am: RBC Consumer Outlook Index, July (prior 51.8)
  • 8:15am: ADP Employment Change, June., est. 160k (prior 135k)
  • 8:30am: Trade Deficit, May, est. -$40.1b (prior -$40.3b)
  • 8:30am: Init Jobless Claims, June 29, est. 345k (prior 346k)
  • 8:30am: Cont Claims, June 22, est. 2960k (prior 2965k)
  • 9:45am: Bloomberg Consumer Comfort, June 30, prior -28.3
  • 10am: ISM Non-Manuf Index, June, est. 54 (prior 53.7)
  • 10am: Freddie Mac mortgage rate survey
  • 10:30am: DoE weekly inventories
  • 11am: Fed to buy $4.75b-$5.75b notes, 4/30/18-3/31/19 range
  • Noon: EIA natural gas
  • 1pm: Baker Hughes rig count


    • House, Senate not in session
    • Treasury Sec. Jack Lew speaks at naturalization ceremony ahead of July 4 natl holiday, 10am
    • President Barack Obama returns from trip to Africa


  • U.S. stock markets mostly closing at 1pm today
  • Markets closed tmw for Independence Day holiday
  • Prudential is first to challenge Treasury’s risk tag
  • Credit Suisse, Deutsche, Barclays ratings cut by S&P
  • Biggest U.S. exchanges said to seek delay in regulations
  • N.Y. state AG examing Wal-Mart, Home Depot fee system
  • Softbank bid for Sprint said to win majority vote at FCC
  • Gardner Denver investors say former CEO helped KKR on deal
  • Yahoo buys iPhone video app maker Qwiki
  • Nasdaq seeking to have Facebook suit dismissed, WSJ says
  • US Airways-AMR merger is subject of antitrust lawsuit
  • Apple said to near deal with Time Warner Cable
  • Fmr. Yves St. Laurent CEO hired by Apple
  • Michael Dell said to have not answered request to raise bid


    • Intl Speedway (ISCA) 7:30am, $0.48


  • WTI Rises Above $100 on Drop in U.S. Stockpiles, Egypt Unrest
  • Israel Chemicals Moves Dead Sea Salt for $1 Billion: Commodities
  • Copper Gains as Traders Close Bearish Bets Amid Supply Concern
  • Wheat Advances for Second Day After Egypt Purchases 180,000 Tons
  • China Said to Buy U.S. Wheat With Purchases Seen at 600,000 Tons
  • Gold Swings as Investors Weigh Physical Demand Against Stimulus
  • Abe’s Third Arrow Seen Striking Tariffs From Pork to Beef
  • Cocoa Climbs on Speculation About Crop Delays; Coffee Declines
  • Japan Nears Switching on Reactors After Tepco’s Meltdown: Energy
  • Paris Wheat Futures Seen Extending Decline: Technical Analysis
  • Wheat-Less in the Pampas Worsens Dollar Drain: Argentina Credit
  • Carbon Plan Wins EU Parliament Backing After Glut Spurs Collapse
  • Nickel Inventories Ease Pace of Growth, Still at Highs: BI Chart
  • Europe-to-U.S. Gasoline Arbitrage Cargoes Seen Plunging 28%


























The Hedgeye Macro Team












July 3, 2013

July 3, 2013 - DTR



July 3, 2013 - 10yr

July 3, 2013 - spx

July 3, 2013 - nik

July 3, 2013 - VIX

July 3, 2013 - dxy



July 3, 2013 - dax

July 3, 2013 - euro

July 3, 2013 - yen

July 3, 2013 - oil

July 3, 2013 - natgas
July 3, 2013 - gold

July 3, 2013 - copper

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Heaven and Power

I am quite unable to see why Heaven or any other Power should object to our telling the Moslem what he ought to think.”

-Arthur Balfour


It’s no wonder why history remembers Lloyd George’s decision making process in Paris in 1919 as so politically conflicted and morally confused. Balfour (British Foreign Secretary 1916-191) and Henry Wilson (George’s chief of the British Imperial Staff) would almost come to blows on big imperialist planning topics (like what to do in Turkey).


Also overlooked were the Turks themselves. Almost everyone in Paris assumed that they would simply do as they were told. When Edwin Montagu, the British Secretary of State for India cried, “Let us not for Heaven’s sake, tell the Moslem what he ought to think, let us recognize what they do think.” (Paris 1919, Six Months That Changed The World, pg 380)


Does getting a bunch of pompous politicians in a room in Paris solve or perpetuate the world’s long-term risks? Post WWI, the answer to that was a disaster. There’s no reason to believe that trying to centrally plan the Egyptians or Portuguese this morning is going to be a success story either. Our centrally planned world is long of political arrogance and short of human empathy.


Back to the Global Macro Grind


From a globally interconnected risk perspective, this morning is one of the uglier ones I’ve seen in the last few months. It’s not just Egypt jamming oil prices up and Portuguese bond yields blasting higher either. Here’s what’s going on:


1.   ASIA – Indonesian stocks (-3%) and the Hang Seng (-2.5%) led a broad based ex-Japan meltdown in Asian Equities overnight. China printed another miss on the Services PMI front (53.9 vs 54.3) in June and it has become clear that Asian #GrowthSlowing is a reality. Every single Asian Equity market other than Japan is now bearish TREND @Hedgeye.


2.   EUROPE – Greek stocks continue to crash this morning (-30% since May 17th); Portugal’s stock market is down -5.7% (10yr bond yield in Portugal tested 8% for the 1st time since November); and the rest of European major Equity markets are trading straight down (Spain -3%, Germany -1.8%, etc); every European Equity market remains bearish TREND @Hedgeye.


3.   CURRENCIES/COMMODITIES – Dollar down small so far, and that’s not a good thing for US Equities (6mth correlation between SPY and USD = +0.76); Brent Oil is testing a breakout back above its $104.95 TREND line @Hedgeye this morning – any sustained close above that price could impose a sequential tax on global consumption in July-August.


Then of course you have Snowden banging around in Bolivia with Morales (or will they be dining in Vienna this evening?) as Obama fans try to put out multiple fires, including another delay on Obamacare.


What on earth could possibly go wrong?


They begged for (and obtained) a mandate for global central planning and now we’re going to have to deal with their mess. How much longer this can continue is anyone’s guess. All the while, there’s one mother-load of their sovereign debts we can short while we wait.


Under our new Global Macro Theme (that was born out of a Q2 one #EmergingOutflows) we are going to roll with emerging #DebtDeflation here in Q312. Yesterday we re-shorted the iShares USD Emerging Market Debt Bond Fund (EMB) and we’re looking forward to introducing a whole new bag full of short ideas in our upcoming Q3 Hedgeye Macro Themes Call. Basically, short politicians.


So if you can’t buy Sovereign Storyteller’s Debt – and you can’t buy Asian or European Equities, what’s left?

  1. US Dollars
  2. US Equities
  3. Beer, Wine, etc.

It’s a good thing US Equity markets close early today. You can get an early start on allocating some of your hard earned 2013 US Equity gains to option #3.


Since we have 26% of the Hedgeye Asset Allocation in US Dollars this morning and only 14% in US Equities (60% is in Cash, which means 0% allocations to International Equities, Fixed Income, and Commodities), we don’t feel like we’ll look entirely naked if the tide rolls out on our 1592 intermediate-term TREND line of support for the SP500 either (5 LONGS, 4 SHORTS @Hedgeye).


Buying anything US Equities is no way to live. Utilities (XLU) versus Consumer Discretionary (XLY) already has a +215 basis point performance spread for Q312 to-date (Utilities -1.28% vs Consumer Discretionary +0.87%). Don’t forget that #StrongDollar and #RisingRates punishes Yield Chasers, people investing in MLPs that can’t pay their dividend (LINE), etc.


As for Heaven and Power, and for the Moslem and Canadian out there that some American central planner wants to pass personal judgment on next, well – on this 4th of July, I’ll be betting on the men and women who will fight for their freedoms, all day long.


Our immediate-term Risk Ranges are now:


UST 10yr 2.41-2.63%



VIX 15.31-17.97

USD 82.78-84.04

Oil 100.22-104.95


Happy 4th of July, and best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Heaven and Power - Bond Price Deflation


Heaven and Power - vp 7 3

Retail Ideas: Where We Stand on WWW, FNP, RH and NKE

Takeaway: Here's our financial overview of where we stand on our Best Ideas. Next up is the 'what can go wrong' analysis. Then some new Bench Ideas.

Here's an update on our key longs in 2013, most notable WWW, FNP, RH, and NKE. While style factors in the market will ebb and flow as it relates to liking small-cap, high-beta names with high short-interest (i.e. everything except Nike), the crux of our long-term calls on the names revolve on earnings, and how much the market does or does not respect the upside (or downside) relative to consensus.


This is an overview of our key calls, and a financial representation of where we're different from consensus.  Next, keep an eye out for more detailed reviews in the 'what could go wrong' department, which we think is critical at this point (so we avoid the dreaded 'round-trip').  Finally, look out for some new names that are currently sitting our idea bench. Enjoy the 4th.


Brian McGough 



1) WWW:  The Street is grossly underestimating the revenue growth opportunity as the legacy WWW scales its recently-acquired brands over its global infrastructure. Under its former owner, Sperry, Keds, Saucony and Stride-Rite only generated 5% of its sales outside of the US, and most of that was in Mexico and Canada. Legacy WWW, on the other hand, is the most global footwear company in the world (yes, even moreso than NKE and AdiBok), with 65% of units sold outside the US through an elaborate network of seamlessly-integrated third-party distributors. Given that the infrastructure is already in place, the incremental sales should be brought on close to a 20% incremental margin, versus 8% margin today. Similarly, minimal capital is needed on the balance sheet to grow these brands, making the growth trajectory over the next 3-5 years very ROIC accretive. The stock might look expensive at 19x earnings and 12x cash flow, but the street’s numbers are low by an incremental 10% per year. We're at $5.65 to the Street's $4.25 four years out.  We’d buy aggressively on a pullback, but are not so sure that will happen. We think WWW is a double over 2-3 years. It’s rare to find names like this.


Retail Ideas: Where We Stand on WWW, FNP, RH and NKE - www


2) FNP: One of the best growth stories in retail. The brand has an $800mm footprint today, but we can build up to at least a $2bn-$3bn footprint over 5-years. What's unique about Kate Spade is that it has a considerable growth runway in its’ existing US handbag business, but also in a) new categories like ready-to-wear, fragrances, eyewear and other accessories, b) new concepts like Kate Space Saturday and Jack Spade, and c) new geographies like Japan and China (already proven), and d) new channel growth opportunities with Outlet growth and e-commerce development.  One thing we like in particular about FNP is that Kate is sitting at an operating margin near 10%. Note that Coach and Kors are closer to 30%. We won't argue that Kate is Coach or Kors -- as its sales per square foot are 40% below those concepts (for now). FNP has been investing in Kate's infrastructure which it will leverage as the top line continues to grow. In other words, we're not very concerned about margins slipping at Kate. Quite the opposite, actually, as we think that margins will approach 20% within 5-years. In the end, we’ve got Kate Spade EBITDA going from $127mm this year to over $440 by year-5 of our model. In the interim, FNP should jettison Lucky and Juicy -- and have $350mm in cash left over after completely mitigating its debt burden. That should leave the company with about $2.25 in EPS power in year 5 based on our math. Spot-checking that math even more simply, let's use a $3bn revenue footprint and a 15% operating margin (maybe the rev is aggressive, but the margin is conservative). we get $450mm in EBIT. After 38% tax rate (which is likely to come down as Int'l % goes up) and 119mm shares, we get $2.35 in EPS. This puts the $22.50 stock price in a different light. We liked it at $5, we liked it at $10, and while we will be vigilant about overstaying our welcome, we still like it at $22.50.


Retail Ideas: Where We Stand on WWW, FNP, RH and NKE - fnp


3) RH: At risk of sounding sensationalistic after talking about the upside in WWW and FNP, we'll say that RH has a growth algorithm that is unparalleled in retail.  Having historically been a retailer that is held hostage to ebbs and flows in the economy and the home furnishings business through its undersized retail stores as well as its catalogue business, the company is dramatically expanding into new categories in the Home Furnishings space in which its current market share is zero. This includes RH Kitchens, RH Tableware, RH Antiques, RH Fine Art, and RH Objects of Curiosity, to name a few.  We're seeing square footage growth bottom out today while the company puts up comps in the +40% range. Then over the next three years, we're going to see square footage growth accelerate to close to 20% by our math at the same time comps will very gradually slow -- but still remain healthy as the new 25k-40k square foot Design Galleries (with sales/square foot between $1,000-$1,500) take the place of the existing 10k square foot stores (ss/ft $600-$800) and make up a greater proportion of RH's overall store base. In other words, the revenue outlook is becoming more stable, not less. Another angle… with the ability to show only 20% of its product to the end consumer, it’s been logistically impossible to showcase all its product offering.  We like to say it's like having a dozen Ferrari's but only a two-car garage. With the recent preannouncements and earnings release, the consensus has come a bit closer to our estimates, but we're still 50% ahead of the Street  in 2015. We think that the longer-term earnings power of RH is better than $5 per share ($3+ bn in sales, and a 12% operating margin). Like WWW and FNP, we'd love it on a pullback. But for now we can't point to one.


Retail Ideas: Where We Stand on WWW, FNP, RH and NKE - rh


4) NKE: Not the huge upside that we see in any other names above. But our estimates are 10-15% ahead of consensus for the next 3-years.  The chief concern most people tend to share with Nike is that the US business, which has been fueling Nike's bottom line, mathematically needs to continue to slow on the margin.   But keep in mind that we have proof that Europe -- both Central and Western -- has stabilized in this business, and we’re anniversarying a slowdown last year in China, and Emerging Markets.  In fact, the company already reported high single digit futures growth, which is in part due to better product pricing (nice tailwind). By the time we begin to lose visibility in the business, the event calendar heats up with World Cup in Brazil.  In the interim, inventories are growing at a lesser rate than both sales and futures, which adds to the bullish gross margin setup.  In all reality, Nike probably set a low bar with its earnings guidance. Our $3.17 for the year is about $0.15 above the Street. The only thing that could stop Nike at this point is Nike. With its current management transition of no fewer than half a dozen senior roles, there will definitely be uncertainty in the organization. But aside from the now infamous Bill Perez CEO year (2005/06) we've never seen a Nike management transition that did not work. It's one area where the company is flawless.


Retail Ideas: Where We Stand on WWW, FNP, RH and NKE - nke

LINE: The Battle Wages On

Takeaway: LINN Energy (LINE) remains overvalued. Our fair value estimates are more than 40% lower than the current stock price.

(Editor's note: The following excerpt comes from today's Hedgeye Morning Newsletter. If you would like more information on how you can sign up to receive these newsletters, please click here.)


“If someone picks on your brother and you don’t stand up for him, don’t bother coming home.”

-Larry Bird, quoting his father (paraphrased)


From a stock research perspective, the last couple of months at Hedgeye have been interesting.  Specifically, our Senior Energy Analyst Kevin Kaiser has been knees deep in a classic battleground stock: LINN Energy.  Kaiser has done an immense amount of independent work on the stock and concluded that the Company is overvalued.  In fact, our fair value estimates are more than 40% lower than the current stock price.


LINE: The Battle Wages On - linn


This research has raised the ire of the Company’s management who has publicly refuted our thesis, has led to numerous ad hominem attacks from the likes of Jim “The Entertainer” Cramer, and also led to a letter to the editor of Barron’s from a large hedge funds that has accused the short sellers of LINN to be “unprincipled”.  (Ironic from a hedge fund that routinely shorts securities.)


Now, admittedly, when we think we are on to something we tend to go all in.  In this instance, that included presenting on the idea a couple of times, participating in the Barron’s article, and publicly defending our research and our analyst.  To Larry Bird’s quote above, if you are not going to defend your ideas and your teammates, don’t bother coming back to Hedgeye headquarters.


Late last night, we were rewarded for our hard work as LINN Energy announced:


“… that they have been notified by the staff of the Securities and Exchange Commission ("SEC") that its Fort Worth Regional Office has commenced a private, non-public inquiry regarding LINN and LinnCo. The SEC has requested the preservation of documents and communications that are potentially relevant to, among other things, LinnCo's proposed merger with Berry Petroleum Company, and LINN and LinnCo's use of non-GAAP financial measures and hedging strategy.”


Now to be fair, this is America, and certainly the Company is innocent until “proven guilty” by the SEC, but nonetheless this was part of our point in warning investors that some of LINN’s practices were likely to attract the scrutiny of the SEC.


As always, though, Mr. Market will ultimately let us know if we are correct in our research on this name.  After all, in the short run the stock market is a voting machine and in the long run it’s a weighing machine.


Back to the global macro grind . . .