Nikkei Smoked

Client Talking Points


The Nikkei got smoked for another -2.8% loss overnight. It's down -4.5% in the last 3 days. Got interconnected global macro market risk associated with Bernanke trying to bend economic gravity? Expectations of global growth slowing are definitely bending now as the Fed’s balance sheet moves toward +$1 TRILLION year-over-year (+$998.1 billion in last night’s report)


We've got a 10-Year Treasury yield of 2.51% now with no immediate-term TRADE support to 2.46% and no intermediate-term support to 2.27%. Don’t forget how hot the monthly U.S. Economic data was in July-September, so it won’t be hard to see October-November data slow sequentially. The bond market is already front-running that – Bernanke completely missed his window to move.


My 2013 bear case for Gold is ending. Now it’s all about timing the bull case. Gold down -0.3% and Silver down -1.7% this morning. So there’s plenty of time to take our time here. We need to see the $1316-1320 zone hold before I pull the trigger.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

In line with our #EuroBulls Q4 theme, we’re long the German DAX via the etf EWG. With European fundamentals showing improvement off low levels, we expect outperformance from Germany, and in turn for the region’s largest economy to pull the rest of the region higher. ECB policy remains highly accommodative and prepared to aid any of its sovereign members to preserve the Union. Inflation remains moderate and fundamentals are positive: confidence readings and PMIs are up since June, with factory orders trending higher and retail sales inflecting to push the trade balance higher. Finally, the unemployment rate has held steady at the low level of 6.9%, all of which signals to us that Germany’s economic climate is ramping up.


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.


Financials sector senior analyst Jonathan Casteleyn continues to carry T. Rowe Price as his highest-conviction long call, based on the long-range reallocation out of bonds with investors continuing to move into stocks.  T Rowe is one of the fastest growing equity asset managers and has consistently had the best performing stock funds over the past ten years.

Three for the Road


Volatility (VIX) not hitting fresh YTD lows as $SPY tests the highs is an impt divergence @KeithMcCullough


Luck is a dividend of sweat. The more you sweat, the luckier you get. -Ray Kroc


The Fed's balance sheet was up another $25.4 Billion week-over-week to $3.839 Trillion.

What's New Today in Retail (10/25)

Takeaway: DECK beats the easy way. AMZN puts up the best SIGMA in yrs. CAB misses due to guns. COLM beats – and as always, issues tepid guidance.



  • Here's a whole host of SIGMA's for the companies reporting after the bell.




Takeaway: Blows away expectations -- printing $0.95 vs the Street at $0.72. But it did so without a revenue beat. As such it kept FY revenue guidance even. The challenge here is that people won't give anywhere near as much credit for a margin beat as a revenue beat. It's all about sell-in for Ugg.


What's New Today in Retail (10/25) - chart1 10 25




Takeaway: Only beat by a penny (and it was because they lost slightly less than the Street estimated).  But revenue smoked expectations -- especially in Media and Electronics, which make up 94% of AMZN total sales. Most notable to us is the SIGMA chart, which swung towards the upper right -- the first time in years we've seen sales grow faster than inventories AND margins improve.


What's New Today in Retail (10/25) - chart2 10 25




Takeaway: The king of the 'beat and guide down' printed $1.57 vs the Street at $1.42. And of course, it guided that 4Q revenue would be down by as much as 2%. The margin direction this quarter was not pretty, and the sales/inventory spread -- while still positive -- eroded on the margin. We'd avoid this one for now.


What's New Today in Retail (10/25) - chart3 1025




Takeaway: CAB misses by $0.02. Prints $0.69 vs Street at $0.71. Comps 3.9% vs Consensus 4.8%. Had it not been for a material slowdown in gun sales, comps would have been 5.3%. I guess we could talk about CAB 'excluding guns', but that would be like referring to Safeway 'excluding food'.


What's New Today in Retail (10/25) - chart4 10 25




Takeaway: Loses less than the consensus expected. Revenue was impressive at $178mm vs expectations of $153mm. 4Q guidance of ($0.03)-$0.01 vs prior guidance of ($0.12)-($0.04). By the looks of the SIGMA, ELY shouldn’t have much problem hitting numbers.


What's New Today in Retail (10/25) - chart5 10 25


TGT - Target in big multichannel holiday push; rolling out in-store pickups



  • "Target Corp. is making a big online push for the holidays, including expanding its in-store pick-up program for products ordered online to all of its U.S. stores by Nov. 1 (the service is now available in about half of the chain’s locations). And for the first time, Target will promote the concept of Cyber Week, with an ad campaign Dec. 1 through Dec. 3 that focuses on Cyber Week deals including Cyber Monday."
  • "Target’s overall holiday campaign, themed 'My Kind Of Holiday,' will extend across all channels, including broadcast, radio, in-store, catalogs, digital and social media."




India Tops Apparel Imports in August



  • "India posted the largest increase in apparel imports to the U.S. in August compared with a year earlier, while Vietnam and Bangladesh, the second and third largest apparel suppliers, respectively, continued to eclipse top supplier China with double-digit gains, a report from the U.S. Commerce Department showed Thursday."
  • "Combined shipments of textile and apparel imports from the world to the U.S. rose 7 percent to 5.4 billion square meter equivalents in August from a year earlier. Total apparel imports were up 5.5 percent to 2.4 billion SME, while textile imports increased 8.3 percent to 2.95 billion SME."
  • "Apparel imports from India rose 17.2 percent to 73 million SME in August compared with August 2012, while apparel imports from Bangladesh increased 16 percent to 161 million SME and apparel shipments from Vietnam rose 14.3 percent to 217 SME. On a combined textile and apparel import basis, Vietnam posted the largest increase with a 16 percent increase to 310 million SME."
  • "Combined imports from China, the top supplier of textiles and apparel to the U.S., were up 10.4 percent to 2.8 billion SME."



RCL onboard revenue growth has grown impressively in 2013, partly due to the success of the new Celebrity 1-2-3 Go program . But can the momentum be sustained into 2014?


  • A revitalization of RCL’s onboard programs has carried RCL through a difficult 2013 operating environment.  The Celebrity 1-2-3 Go program has done particularly well.
  • RCL’s core itineraries in the Caribbean have been 7-9 day cruises, which tend to attract repeat cruisers.  Repeat cruisers generally spend more on the ship.
  • Since 2001, 2013 was the only time where RCL onboard and other revenue grew while CCL’s fell.  It should be noted that the ‘other’ component (Pullmantur excursions) have had an adverse impact so far in 2013.
  • As the charts below show, the last couple of times where RCL ticket revenue growth lagged onboard revenue growth by ~5%+, onboard lagged ticket by at least a couple of % points the following year
  • Because of Caribbean pressures, ticket revenue continues to grow at a tepid pace.  As mgmt mentioned on the call, ticket revenue would play a larger role in 2014, largely due to harder comps on the onboard revenue side.  There’s much more uncertainty with that part of the business.




real-time alerts

real edge in real-time

This indispensable trading tool is based on a risk management signaling process Hedgeye CEO Keith McCullough developed during his years as a hedge fund manager and continues to refine. Nearly every trading day, you’ll receive Keith’s latest signals - buy, sell, short or cover.

Boom, Crush!

This note was originally published at 8am on October 11, 2013 for Hedgeye subscribers.

“Boom, crush. Night, losers. Winning, duh.”

-Charlie Sheen


Yesterday was one of those days that people absolutely loved or hated. Watching my Twitter #ContraStream was quite comical actually. Some of the “intellectual” types just couldn’t believe what was happening. Some of the bros were tweet-panting.


I think most of you know that I’m not the smartest player in this game. I think that helps me. I think less when I change my mind and/or position. That’s by design. After making almost every mistake you can make in this game with live ammo (multiple times), I’ve built in blinders (machines) for my emotions. They stop me from over-thinking.


To each their own. Like you, I have my style biases. One of the big ones is approaching this game of globally interconnected-risk from an athlete’s perspective. I know we can’t win unless I grind alongside my teammates. I also know we’ll lose if we don’t respect Mr. Market’s signals.


Back to the Global Macro Grind


VIX snaps @Hedgeye TREND support of 18.98; SP500 rips through 1663 @Hedgeye TREND resistance. “#Boom, Crush!” The Signal within the manic media’s noise made it so simple that even a hockey player could do it.


And what did we learn?

  1. Respect the setup (the signal was screaming into event risk that government could save us from themselves)
  2. Stay with the confirmation (the signal said stay with the early part of the move; don’t sell)
  3. Let it ride (9 LONGS, 3 SHORTS @Hedgeye – with 2 of the 3 SHORTS being bond shorts)

Do you know how many times in the last 15 years that I have violated not one, but all 3, parts of that risk management process? I don’t. And that’s primarily because 5 and 10 years ago, I didn’t have this dynamic signaling model. It evolves.


What you’ll quickly note in steps 1-3 of the decision making tree is that there are no points for intellectual IQ. Mr. Market doesn’t care how smart you are. He couldn’t care less what your position is either. The only thing that matters is how well you listen to him.


For me at least, just getting to step 1 was tough – and that’s primarily because I think the Fed leaning on the long-end of the curve, suppressing rates, and devaluing the Dollar, is a textbook #GrowthSlowing signal. But that fundamental signal should never be confused with a quantitative risk management signal. In the immediate-term they can be 2 very different things.


Once I accepted the VIX/SPY signal for what it was, what did I do next?

  1. Stayed with the confirmation – that means I got longer on green (covered a short, bought a long)
  2. Then I let it ride throughout the day despite every bone in my body telling me to sell

What do my bones have to do with it? Listen to them and prepare to be crushed. “Night, losers.” Letting a winning move ride is easily the hardest thing for me to do. Why? Because I love booking gains. And for that very reason, I tend to book them too early.


So, I need to be better than that and let the signal tell me when/where it’s the right time to sell. I’m nowhere near as bad as I used to be on this front. But I have a lot of room to improve.


Let’s use SP500 levels as an example of why I’d let that ride yesterday and drop our Cash position to 42% (we started the week net short in #RealTimeAlerts and had a 55% Cash position in the Hedgeye Asset Allocation model):

  1. SP500 intermediate-term TREND resistance became support at 1663; that’s a big line
  2. SP500 immediate-term TRADE breakout line = 1681; layered on top of the TREND, that’s even bigger
  3. SP500 immediate-term TRADE resistance = 1708; that’s up another +0.9% from the 1692 close

All the while, I’m considering the emotion and intensity of the move (this is where the Twitter #Contra-Stream I built is priceless) within the context of the prior 2013 US stock market “corrections.”


As you can see from Darius Dale’s Chart of The Day, each of the last 3 corrections has:


A)     been to higher-lows

B)      been less of a % move than the prior correction

C)      been on less volume than the prior correction


Markets that people hate are the best ones to be long; particularly when corrections are confirmed by weak volume and lower-high volatility signals. Again, to contextualize this recent SP500 correction:

  1. SEP 18 to OCT 8 correction = -4.1%
  2. AUG 2  to AUG 27 correction = -4.6%
  3. MAY 21 to JUN 24 correction = -5.8%

And I get it. For the last 3 weeks I wrote to you every day that I wasn’t buying this correction like I did the AUG and JUN corrections. But I also get when and why I changed my mind. There are no rules against doing that. “Winning, duh!”


My Macro Team and I will be hosting our Q413 Global Macro Themes Conference Call at 11AM EST. Ping if you’d like to have access to our most recent research and risk management thoughts.


Our immediate-term Risk Ranges are now:


UST 10yr 2.65-2.71%

SPX 1682-1708

DAX 8601-8729

VIX 15.18-18.98

USD 80.20-80.74

Gold 1271-1311


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Boom, Crush! - Chart of the Day


Boom, Crush! - Virtual Portfolio

Monsters, Inc.

"Whoever fights monsters should see to that in the process he does not become a monster.  And if you gaze long enough into the abyss, the abyss will gaze back at you."

- Nietzsche 


Yesterday I was flying out to San Francisco and the United Flight I was on lacked two key things: access to the Internet and/or a choice in movies.  As a result, I was stuck watching Monsters, Inc. 


For those of you that have progeny perhaps you've seen it already? I'm still in the bachelor camp, so don't regularly watch Pixar cartoons.  I also have to sadly report, it wasn't all that scary, though it was cute and funny. 


The movie did, however, make me think about a few things that currently scare me about the U.S. economy. In no particular order, my biggest fears are:


1) The Federal Reserve - We certainly harp on the Federal Reserve and rightfully so as an un-elected and largely unaccountable body with the power to influence the global economy is very scary.  Our biggest concern is the excesses that are being built into the system because of elongated, extreme monetary policy. 


The economy is growing and the unemployment rate is in decline, but we remain at the zero bound in interest rates.  Admittedly the policy has helped to inflate some asset classes, such as housing, that were a major anchor on the banking system.  Unfortunately, this extreme monetary policy has created an economy and set of markets that are highly sensitive to central bank actions. 


In the chart of the day, we highlight this point by looking at the volatility that is occurring in the interest rate market. As an example, rates on the 10Y spiked ~37% in 3Q13.   This is as substantial a move we've seen on a percentage basis in fifty years. Further, in the wake of Bernanke’s confused policy communication on Sept 18th, we’ve seen a marked reversal in 10Y treasury yields with rates declining -17% off peak levels. 


2) Macro Data - Admittedly it's odd for a macro analyst to be scared of macro data, but I am and here's why - it is often grossly inaccurate. 


An example from our research earlier this week was a note I wrote on gold (somewhat of a meaningful asset class). The note took a deeper look at a letter gold bug Eric Sprott wrote to the World Gold Council on supply and demand in the global gold market. 


Sprott's thesis is that the global supply and demand numbers for gold grossly overstate the excess supply of gold in the world. In fact, Sprott thinks that in the year-to-date we are running at a supply deficit of some 503 tonnes.


Meanwhile the World Gold Council's projections for the year-to-date suggest the world is over supplied by a tune of 217 tonnes.  If we annualize both sets of projections, the difference between them is a notational value of some $50 billion dollars.  Not exactly chump change !


If you are one of those people that like to invest based on concrete date, like me, you must be scared of some macro data at times as well.  If you believe Sprott, then you should be buying gold hand over fist, and if you believe the World Gold Council, you should be selling. 


While we do like it when we get concrete data that informs us, as it relates to gold we'll stick with our sneaky correlation models, which show a very tight correlation to the Federal Reserve balance sheet and prevailing, forward policy expectations.  Interestingly, for the first time in a year, gold is actually looking like a buy in our quant model.  Scary indeed!


3) U.S. Economy - Coming out of the Great Recession, the U.S. outperformed many of its western peers in both labor market and broader economic improvement.  From here, though, there a few reasons to be scared. 


The equity markets domestically have been on a tear and are literally registering new all-time highs – but, of course, with highs in equities and expanding multiples come high expectations for forward fundamentals.  A few things that might not be so rosy on the U.S. over the next few months include:


1)   Debt and debt ceiling - The uncertainty on the recent debt ceiling debacle led to a meaningful decline in consumer confidence and a slowing in economic activity.  There is now a series of dates from December to February, that investors will be watching to see if there will be another debt ceiling scare or government shutdown.  In markets, confusion breeds contempt.

-  December 13th – the date when a House-Senate committee will report back on negotiations on a longer term budget deal;

-  January 15th – the date on which the government is now open until subject to another budget agreement being reached; and

-   February 7th – the next debt ceiling.


2)   Corporate earnings – The results from U.S. corporate this quarter haven’t been terrible, but they certainly haven’t been gangbusters either.  As of yesterday, 52% of companies are seeing sales accelerate, 51% are seeing earnings accelerate, and 47% are seeing operating margins expand.  That sounds good, but the translation is that over half of corporate America is seeing earnings, revenue and margins decelerate.


3)   Financials – We’ve already become more cautious on the financial sector over the last couple of days as we’ve taken Franklin Templeton off our Best Ideas as we see the outflow from bond funds slowing.  More broadly, as the yield curve narrows, this is negative for banks generally.  Borrowing short and lending long doesn’t pay in a narrow yield curve environment.  In the year-to-date, financials has been a market leader up 26%, the second best sector after consumer discretionary.  If this reverses, it will be hard for the SP500 to march higher.


Halloween is only six days away, so I don’t want to scare you too much . . . Boo! Or do I?


Our immediate-term Global Macro Risk Ranges are now as follows:



VIX 12.02-15.01

USD 78.81-79.74

Euro 1.36-1.38

Yen 97.06-98.63

Gold 1


Enjoy the weekend.


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


Monsters, Inc. - 10Y Yield CoD


Monsters, Inc. - Virtual Portfolio


Enter your email address to receive our newsletter of 5 trending market topics. VIEW SAMPLE

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.