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November 7, 2013

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TODAY’S S&P 500 SET-UP – November 7, 2013

As we look at today's setup for the S&P 500, the range is 20 points or 0.93% downside to 1754 and 0.20% upside to 1774.                                                             










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.35 from 2.35
  • VIX closed at 12.67 1 day percent change of -4.52%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: BoE seen holding bank rate at 0.5%
  • 7:45am: ECB seen holding rates at 0.5%
  • 8:30am: ECB’s Draghi holds press conference
  • 8:30am: Init. jobless claims, Nov. 2, est. 335k (prior 340k)
  • 8:30am: GDP, 3Q, est. 2.0% (prior 2.5%)
  • 8:30am: U.S. announces amounts of 3Y notes, 10Y notes, 30Y bonds to be sold at following week’s quarterly refunding
  • 9:45am: Bloomberg consumer comfort (prior -37.6)
  • 10am: Mortgage delinquencies, 3Q (prior 6.96%)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Fed to buy $1.25b-$1.75b in 2036-2043 sector
  • 1:30pm: ECB’s Draghi speaks in Hamburg
  • 1:30pm: Fed’s Dudley speaks in NY
  • 1:50pm: Fed’s Stein speaks in Chicago
  • 3pm: Consumer credit, Sept., est. $12b (prior $13.625b)


    • FAA to outline civilian drone guidelines
    • 9:30am: Army Chief of Staff Gen. Raymond Odierno; Chief of Naval Operations Adm. Jonathan Greenert; Commandant of the Marine Corps Gen. James Amos; and Chief of Staff of the Air Force Gen. Mark Welsh III, testify before Senate Armed Svcs Cmte hearing on sequestration and national defense
    • 10am: Treasury Sec. Jack Lew tours exporter of telecom equipment in Gaithersburg, Md.
    • 10am: Senate Banking, Housing and Urban Affairs Committee holds hearing on “Housing Finance Reform: Essential Elements to Provide Affordable Options for Housing.”


  • Twitter IPO raises $1.8b at $26/shr, pricing above range
  • Twitter IPO yields one of smallest fee rates this year
  • Microsoft’s internal CEO candidate list said to include Turner
  • Toll Bros. to buy Shapell Homes for ~$1.6b
  • Emirates pressing Boeing on 777X performance before deal
  • Southwest, JetBlue showing interest in AMR-US Airways slots
  • Qualcomm looked at some BlackBerry assets, CEO says
  • Fmr. AIG real estate exec. settles pay case for $274m
  • Washington voters defeat measure requiring GMO food labels: AP
  • Chinese domestic fund managers to offer U.S. products: WSJ
  • U.S. Oct. retail sales may have slowed vs Sept.


    • AES (AES) 6am, $0.34
    • AMC Networks (AMCX) 8:30am, $0.87
    • Ameren (AEE) 7:48am, $1.23
    • American Realty Capital (ARCP) 6am, $0.19
    • ANSYS (ANSS) 7:09am, $0.75
    • Apache (APA) 8am, $2.16 - Preview
    • Apollo Global Management (APO) 7am, $0.93
    • BCE (BCE CN) 6:52am, C$0.78
    • Cablevision Systems (CVC) 8:30am, $0.12
    • Calpine (CPN) 6am, $0.65
    • Canadian Tire Corp (CTC/A CN) 7:31am, C$1.77
    • CI Financial (CIX CN) 11:27am, C$0.39
    • Coty (COTY) 6am, $0.29
    • Crescent Point Energy (CPG CN) 8am, C$0.30
    • Dynegy (DYN) 7:30am, $0.14
    • Fifth & Pacific (FNP) 7:32am, $(0.01)
    • Flowers Foods (FLO) 6:30am, $0.21
    • Great-West Lifeco (GWO CN) 10:24am, C$0.59
    • Himax Technologies (HIMX) 6am, $0.11
    • IGM Financial (IGM CN) 10:30am, C$0.79
    • International Game Technology (IGT) 6:30am, $0.34
    • Laredo Petroleum Holdings (LPI) 6:55am, $0.16
    • Manulife Financial (MFC CN) 6am, C$0.32
    • Martin Marietta Materials (MLM) 8:10am, $1.46
    • New Residential Investment (NRZ) 6:30am, $0.18
    • Radian Group (RDN) 7am, $(0.07)
    • RioCan Real Estate Investment (REI-u CN) 7am, C$0.40
    • Rockwell Automation (ROK) 7am, $1.53
    • Royal Gold (RGLD) 8am, $0.24
    • Saputo (SAP CN) 9:39am, C$0.76
    • Scripps Networks Interactive (SNI) 7am, $0.84
    • SouFun Holdings (SFUN) 6:45am, $0.88
    • Starwood Property Trust (STWD) 6:45am, $0.54
    • Stratasys (SSYS) 7am, $0.42
    • Tim Hortons (THI CN) 7:30am, C$0.77
    • TMX Group (X CN) 6am, C$0.74
    • Towers Watson (TW) 6am, $1.33
    • Vermilion Energy (VET CN) 6:55am, C$0.77
    • Visteon (VC) 6am, $1.16
    • Wendy’s (WEN) 7am, $0.06 - Preview
    • Westlake Chemical (WLK) 6am, $2.20
    • WhiteWave Foods (WWAV) 8am, $0.18
    • Windstream Holdings (WIN) 6:15am, $0.09
    • WPX Energy (WPX) 7am, $(0.21)


    • Allscripts Healthcare (MDRX) 4:01pm, $0.09
    • Amarin (AMRN) 4:02pm, $(0.32)
    • Arena Pharmaceuticals (ARNA) 4:03pm, $(0.12)
    • AuRico Gold (AUQ CN) Aft-mkt, $0.02
    • AVG Technologies (AVG) 4:15pm, $0.47
    • CareFusion (CFN) 4:02pm, $0.39
    • Clean Energy Fuels (CLNE) 4:05pm, $(0.23)
    • Credicorp (BAP) 6pm, $2.43
    • CubeSmart (CUBE) 4:30pm, $0.24
    • Groupon (GRPN) 4:01pm, $0.01 - Preview
    • Mettler-Toledo Intl (MTD) 4:01pm, $2.60
    • Molycorp (MCP) 4:01pm, $(0.28)
    • Monster Beverage (MNST) 4:05pm, $0.57
    • Nektar Therapeutics (NKTR) 4:15pm, $(0.40)
    • Northern Oil and Gas (NOG) 4:30pm, $0.32
    • NVIDIA (NVDA) 4:20pm, $0.25
    • Pengrowth Energy (PGF CN) 4:30pm, C$0.02
    • Pharmacyclics (PCYC) 4:01pm, $0.76
    • Priceline.com (PCLN) 4:01pm, $16.22 - Preview
    • Santarus (SNTS) 4:05pm, $0.33
    • tw telecom (TWTC) 4:01pm, $0.12
    • Walt Disney (DIS) 4:15pm, $0.76 - Preview
    • Westar Energy (WR) 5pm, $0.99


  • LME Changes Warehousing Rules to Shorten Withdrawal Times
  • Brazil Soy Crop Surpassing U.S. Expands Global Glut: Commodities
  • Coffee Falls to 7-Year Low on Latin American Supply; Sugar Drops
  • Corn Touches Three-Year Low as USDA Seen Raising Crop Outlook
  • Brent Falls to Lowest Since July on Warm Weather Across Europe
  • World Food Prices Advance for First Time in Six Months on Sugar
  • Rebar Climbs on Speculation Air Quality Efforts May Curb Output
  • Gold Swings Between Gains and Losses in London Before U.S. Data
  • Tin Shipments From Indonesia Jump as Trade Rule Gains Traction
  • ArcelorMittal Turns Optimistic on 2014 as Profit Beats Estimates
  • China Seen by Klapwijk Boosting Gold Reserves as Prices Drop
  • Crude Forecasters Diverging as Contango Emerges: Energy Markets
  • Warmer Start to Winter Weakens Gas Demand Throughout Europe
  • Crude Traders Sticking With Brent Amid Manipulation Claims


























The Hedgeye Macro Team














Soft Tyranny?

This note was originally published at 8am on October 24, 2013 for Hedgeye subscribers.

“The will of man is not shattered, but softened, bent, and guided…”

-Alexis de Tocqueville


If we need a French guy to tell us what, precisely, is wrong with an un-elected US Federal Reserve whose Chairman has unlimited power over both the value of your currency and rate of return on your savings, so be it.


“… men are seldom forced by it to act, but they are constantly restrained from acting. Such a power does not destroy, but it prevents existence; it does not tyrannize, but it compresses, enervates, extinguishes, and stupefies people, till each nation is reduced to nothing better than a flock of timid and industrious animals, of which government is the shepherd.”


Isn’t it sad? But which part is the saddest? Is it the cowardice in free-market leadership, or the groupthink grounded in how much people will pander to a man that gets them paid? I don’t know anymore. I read this Tocqueville passage at a picnic table at a rest stop in Maine last night. I lit up a cigar, and I felt like I was going to puke.


Back to the Global Macro Grind


The thought of Gold ripping and #GrowthSlowing because an un-accountable central planner doesn’t allow economic gravity to get marked-to-market makes me sick to my stomach. I run a small business in America. I have a payroll to meet and people to inspire – it gets a lot tougher when the economy slows than when it’s accelerating.


Not that anyone in Washington cares, but I’ll be fine. I started this firm during the thralls of 2008 when Bernanke thought the “shock and awe” rate cuts to 0% were going to save government from itself. So I can take a P&L punch. But if the buck keeps burning and rates keep falling, Bernanke, Obama, and “progressive” Republicans are going to knock some people right out.


I don’t agree with everything he says or thinks, but I think Mark Levin has this part of it right: “The nation has entered an age of post constitutional soft tyranny” (The Liberty Amendments, pg 4). And I’m not talking about politicized social issues or anything outside of my domain of required reading – I’m talking about the economy and markets.


How else would you describe a market that hangs on every breath of what an un-elected body @FederalReserve says and/or hints next? Forget the soft stuff – this is hard core tyranny.


So, after being the US #GrowthAccelerating bulls for the better part of the last year, how do we reposition for?


1.       Down Dollar

2.       Rates Falling

3.       #GrowthSlowing


Whether you like the probability of these things occurring or not, it’s officially rising. But you already know that. You can see the “growth style factors” in your portfolio slowing.


Yesterday’s US stock market correction (from the all-time highs) was led by the Financials (XLF). The only S&P Sectors in our 9 Sector Model that were up on the day were the 2 slowest growth sectors – Utilities (XLU) and Consumer Staples (XLP).


What else has been working this week?

  1. Gold
  2. Bonds
  3. Volatility

Isn’t that just great? Think about that for another few seconds – AT THE ALL-TIME HIGH IN THE US STOCK MARKET, GOLD, BONDS, and VOLATILITY WENT UP! And CNBC’s big government access ratings hit new lows.


This has never happened before…  that’s why it “enervates, extinguishes, and stupefies people.”


Why has it never happened before? That’s easy. We have never been at these all-time highs before – and the Bush/Obama Bernanke legacy now has plenty of “this time is different” economic policy that history will have plenty of time to review.


Is this time really different? Is it still 2008? Or do the people in Washington who are plundering your currency for political gain look like they are living through Bernanke’s said 1936 depression?


Or is it 2013 – the year when de Tocqueville finally nails it on US monetary policy being that soft tyranny that we are all so numb to that we just allow it to exist?


2013 FACT: as US economic growth accelerated (Dollar Up, Rates Up), the bond, currency, and stock markets all had this right. That’s why Gold got tapered. On September 18th, 2013, Ben S. Bernanke restrained market forces from acting as they were.


I don’t think torching the currency, starving savers or a risk free-rate of return, and trying to arrest economic gravity ends well for Americans. That’s why I went to 58% cash yesterday and I still feel like I am going to puke.


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


UST 10yr Yield 2.47-2.60%

SPX 1728-1754

VIX 12.01-14.62

USD 78.99-79.98

Euro 1.36-1.38

Gold 1316-1341


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Soft Tyranny? - Chart of the Day


Soft Tyranny? - Virtual Portfolio

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[video] Twitter's IPO: $TWTR Too Expensive?

RL: We're Concerned

Takeaway: We give the print a C, quality of EPS = D- and cash conversion = F. If you doubt RL is in serious transition, this conf call is your proof.

CONCLUSION: We did not like RL's quarter one bit. Almost every line of the P&L failed to impress us, and the erosion in the cash cycle further impeded RL's ability to convert GAAP profit to cash.  Though CFO Peterson crushed it on the call, Roger Farah was definitely missed. We took our numbers down to be about in-line with RL's guidance. This is the first time in nearly a decade that we don't have confidence that RL will meaningfully beat expectations. We need a sit-down with management to reignite our confidence in the story.


This quarter did nothing to ease our growing concerns about RL. We were upbeat into the print, but despite the beat, we did not like the quarter one bit. Specifically…

  1. RL technically beat the quarter -- with EPS of $2.23 versus the consensus at $2.20. But by our math, it had a $0.09 tax benefit relative to expectations. We call that a miss.
  2. Sales were up only 2.8%, but the company somehow managed to translate that to EBIT down 15%. Yes, there was a business model change with its Chaps business moving from Licensing to Wholesale -- and FX hurt as well. But even excluding those items operating cash flow was down.
  3. Inventories were up 15%, or nearly 6x the rate of sales growth. That amounts to seven more days inventory on hand than a year ago. That would maybe be palatable, but last year's DIH was up a whopping 17 days. In other words they had an easy comp and couldn't comp it.
  4. On the plus side, Receivables were down 4%, which is great. Unfortunately, the DSO decline was entirely offset by weaker payables. In the end, the cash conversion cycle (DSO +DIH less DPO) came crashing in at 137 days -- up 7.7 days vs last year. This marks the worst 2Q cash cycle in 13 years.
  5. One thing we still don't get is how net PP&E came in at $1.28bn -- a 36% sequential increase, or $336 million.  That's the size of RL's entire capex budget this year. And in fact, it spent $148mm this quarter. Perhaps there's a simple answer that we're just unaware of, but it's rare to see PP&E go up 2x the rate of capex. (Chaps closed in 1Q, not 2Q -- so that shouldn't explain it).
  6. Comps at retail stores were down 1%. Bulls will point to the fact they'd have been up 1% excluding FX. But is +1% really anything to be bullish about?
  7. Roger Farah was not on the call. I guess that was inevitable given that he's operating in a diminished role versus the past 10+ years. But for anyone wondering about his level of involvement in the day to day operations of the company, his absence from the call sent a pretty clear signal. It's possible that he chose to abstain in order to give more limelight to Jackie Nemorov, as Roger's presence on the call might have undermined her role to the employee base. But still, it clearly tells the Street that he's handing over the reins.
  8. As for Jackie Nemorov, we'd give her a C+ for how she came across on the call and the confidence that we think she instilled in the investment community. Seriously, did we have to hear about why it's a good idea for us to buy our wives a Ricky bag? Or that the company hosted a fashion show for dogs this quarter?  The answer there is a big No from our perspective.  She should have used her Presidential debut as a venue to highlight her precision on the numbers and focus on a smaller number of key big ideas. The sad thing is that we think that Nemorov is extremely competent, and is a very good leader internally. But it did not come across on the call.
  9. At risk of playing favorites, we think that Chris Peterson was absolutely fantastic on the call. He gets an A+. He was crisp, clear, confident, and answered every question in a way that both gave good insight into the company, but also furthered RL's agenda. It's amazing to thing that he has only been the CFO of a publicly-traded company for a year.  Truth be told, if Peterson was not at RL, we'd be extremely negative on it right now. His presence numbs the blow of Farah stepping back to a huge extent.
  10. Its SIGMA trajectory is horrendous. Last quarter was bad enough when margins turned down by 260bp, but at least inventories were somewhat manageable (-5% relative to sales). But in 2Q14 we saw a 330bp erosion in margins on top of a -12% erosion in the inv/sales ratio.  As a point of reference, it's been 14 quarters since RL's sales/inventory spread has been positive.
  11. The biggest plus is that we're likely to see a 25% acceleration in growth over the next two quarters. Chaps coming online to RL's wholesale division is a big help, and it looks like Europe is finally in a good enough place to start taking more inventory. In addition, Peterson made it clear on the call that the first two months of the quarter were weak, but September was significantly stronger. That's a trend that is impossible to ignore.


RL: We're Concerned - 11 6 2013 3 24 36 PM




RL: ST and LT Calls Are Very Different



CONCLUSION: We have a bifurcated view on RL right now. We like it from both a TRADE and TREND perspective, as expectations are too low headed into Wednesday's print, as RL guided to a msd decline in EPS, but in reality they’re going to post EPS growth of at least 1,000bps higher. Furthermore, the company will begin to show a meaningful acceleration in EPS growth over the next two quarters (near 30%) that should put it in the top decile of earnings growers in retail.


But from a TAIL vantage point, we're far less constructive. As much as we like how the company is executing on its long-term initiatives (international expansion, dot.com, and real estate), we're concerned about the recent changes in the C-suite. In the end, our degree of confidence in how the company will be executing three-years out is partially diminished.



So why are we concerned about management? Roger Farah shifting 50% of his time away from the company simply does not sit well with us.  The fact is that Roger has been incredibly effective over the past decade. Ralph might be the CEO, but Roger has basically executed on everything that is outside of the creative side of the organization. Yes, it's a positive that the company still has him given that it was a risk that he'd leave entirely. But we just don't buy the concept of a part-time COO. The way we see it, you're ether in or you're out. It's like being half pregnant.


On the flip side, the promotion of Chris Peterson is a big positive. He's one of the top 5 retail CFOs we've met -- which says a lot. At P&G he was heavily responsible for parts of the organization outside that of a traditional CFO (and his division of P&G was 5x the size of RL).


Similarly, Jackie Nemerov, who was also promoted and reports directly to Ralph Lauren, is far more capable than many on Wall Street likely give her credit for. There's no one at the company (perhaps with the exception of Ralph himself) who has earned more respect and loyalty by her direct and indirect reports. In the end, as incredibly effective as Roger has been over the years, the reality is that some of that was likely Nemerov adding to the size of his halo.


Lastly, we need to consider Ralph Lauren himself. He's one of the more successful CEOs in retail, and has created one of the best brands in apparel. But we can't ignore the fact that he just turned 74. There's not a whole lot of CEO's in the S&P that are over 70. In fact, there are only 14 CEOs in America who are older than 74. Not that there is a set formula for when a person needs to stop working, but it’s worth noting that the average retirement age for CEOs is between 60-65.


We're not questioning Mr. Lauren's competence. How could we? But he's such a powerful force inside the company, and the likelihood of him being the boss in another five years -- at least in his current capacity -- is not too great. We don't have a problem with this at all. But where we're more concerned is that we're not sure the Board has any clear succession plans for Mr. Lauren. That's probably because the Chairman of the Board is also the CEO -- and he has no plans to go anywhere anytime soon.


In the end, there are two things that are certain; 1) The company is executing and has increasing momentum in its business, but 2) The company is undergoing the most significant period of transition in the executive offices that RL has seen since before 2000. 


Please join us for a Flash Call on the cruisers this Thursday, November 7th at 11:30am EST.


On the call, the team will walk through the latest results of Hedgeye's proprietary cruise pricing model and what it means for the cruise stocks.




  • Latest pricing trends from 12,000 itineraries spanning 7 geographic regions
  • Relative trends and YoY pricing analysis
  • Hedgeye's view on CCL, RCL and NCLH 

As an example, the chart below shows where the survey was taken and the corresponding stock price moves for Carnival (CCL).  The red circles indicate a bearish pricing trend while the green circles indicate a bullish pricing trend.




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