A Nikkei & Bronco Beatdown

Client Talking Points


An absolutely horrendous start to 2014 for the Nikkei. It's down another -2% overnight to -10.3% year-to-date. Ugly like Denver. In our Global Macro Themes deck for Q1, Japan was a big outlier on sequential #GrowthSlowing from its tax-pull-forward 2013 peak. JGBs agree with 10-year yields -12 basis points month-over-month to new lows this morning of 0.61%.


Brent Oil looks like hell. It's nothing like the CRB Index right now. Brent remains bearish TREND here at Hedgeye with resistance up at $108.62. The US consumer is in dire need of a tax cut, and she won’t get it from new Fed Head Janet Yellen via a rate hike, so Oil is a big hope.


The 10-year yield down at 2.65% continues to signal lower-highs (2.76% resistance) and lower-lows on our intermediate-term TREND duration which is now bullish for bonds (bearish for yields) as rate of change in US #GrowthSlowing manifests.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

JPMorgan shares are currently trading with the most implied upside to fair value in our fair value model for money-center, super-regional and regional bank stocks. By our estimates, JPM shares have upside of 33% based on our regression of EVA (economic value added) – which looks at the spread between return on capital and cost of capital – and the current multiple to tangible book value. Over time, we have found that sizeable discounts and premiums mean revert toward fair value giving JPMorgan an embedded tailwind in 2014.


We remain bullish on the British Pound versus the US Dollar, a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve) and the Bank maintaining its existing asset purchase program (QE). UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers, which should provide further strength to the currency. In short, we believe a strengthening UK economy coupled with the comparative hawkishness of the BOE (vs. Yellen et al.) will further perpetuate #StrongPound over the intermediate term.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


JAPAN: Nikkei bulls getting splattered, -2% overnight to -10.6% YTD Manning to be sponsored by the Nikkei @KeithMcCullough


"Being the richest man in the cemetery doesn't matter to me. Going to bed at night saying we've done something wonderful, that's what matters to me."

- Steve Jobs


Global funds pulled $6.3 billion from emerging-market stocks in the week through Jan. 29, the biggest outflow since August 2011. More than $12 billion has fled the funds this year, already approaching 2013’s outflow of $15 billion. (Bloomberg)

What's New Today in Retail (2/3)

Takeaway: WMT new CEO starts day after miss. Coincidence? AdiBok loses another sponsorship/NKE. LULU sells defective pants again. JOSB behaving badly.



KORS - Earnings Call: Tuesday 2/4 8:00 am




Walmart updates FY14 underlying EPS guidance for fourth quarter and full year



  • "The company had provided fourth quarter diluted earnings per share from continuing operations (EPS) guidance of $1.50 to $1.60, which included a $0.10 per share impact from two discrete items, which resulted in an underlying EPS guidance range of $1.60 to $1.70." 
  • "For the full year, the company expected to deliver EPS of $5.01 to $5.11 and accounting for the $0.10 of discrete items, the range for underlying EPS was between $5.11 and $5.21."
  • “'We now anticipate that our underlying EPS for the fourth quarter of fiscal 2014 will be at or slightly below the low end of our range of $1.60 to $1.70,' said Charles Holley, Wal-Mart Stores, Inc. chief financial officer.  'For the full year, we expect underlying EPS to be at or slightly below the low end of our range of $5.11 to $5.21.'"


Takeaway: Key consideration -- new CEO Doug McMillon's first day on the job was Saturday, the day after the EPS guide-down. Clear the deck for the new boss? That's what it sounds like to us.


LULU - Lululemon 'Inadvertently' Sold A Bunch Of Sheer Pants Again



  • "Once again, the yoga retailer's customers are complaining about sheerness, this time after an online warehouse sale in Canada."
  • "While the items came with a tag saying 'things don't always go as planned, this garment has fit, function, or visual imperfections,' the defects apparently weren't disclosed at the point of sale online."
  • "A Lululemon spokesperson confirmed to us that some defective pants were sold to customers without proper disclosure. 'This is the first time we’ve had an online warehouse sale, which included a variety of items. Some items with a 'things don’t always go as planned' tag inadvertently ended up in our inventory,' the spokeswoman said."


Takeaway: Is this really the way to rebuild customer loyalty LULU? Unfortunately for the company, it is in a fishbowl. Everyone is watching its every move, and criticizing them accordingly. Is it fair? No. But LULU made its bed, and now it has to sleep in it.


NKE, ADDY - Tennessee athletic department says it will switch to Nike when its Adidas contract runs out



  • "Tennessee has agreed on an apparel deal with Nike that will take effect when its contract with Adidas expires in the summer of 2015."
  • "The university announced the eight-year agreement Friday and said it called for Nike to supply apparel, uniforms, footwear and additional equipment for each of the school's 20 athletic programs as well as its spirit squads. Contract details obtained through a public records request indicated the deal was worth approximately $35 million."
  • "Tennessee's contract with Adidas runs through June 30, 2015. Tennessee had partnered with Adidas since 1997."


Takeaway: This is less about Nike and more about Adidas. It lost Notre Dame to UnderArmour just a few weeks ago. Now it loses another school to Nike. Either AdiBok is getting more conservative with resources allocated to US college sports, or the US brands are simply upping the ante and going for Adi's jugular. Our sense is that the company realizes that its market share has been decimated even while paying up for these expensive endorsements. It needs to allocate resources to higher ROI initiatives -- like coming out with product that people actually want to buy.


JOSB - Jos. A. Bank in Talks to Acquire Eddie Bauer



  • "Jos. A. Bank Clothiers Inc. is in talks to buy fellow apparel retailer Eddie Bauer, according to people familiar with the matter, a deal that, if consummated, would dramatically shake up a takeover battle Jos. A. Bank has been waging with Men's Wearhouse Inc. Details including what price is being discussed couldn't be learned."


Takeaway: On a standalone basis, JOSB buying Eddie Bauer doesn't make a whole lot of sense. Synergies are tough to envision or model. It's hard to shake the premise that JOSB is doing a deal simply to shake up the MW offer. The lack of Corporate Governance here is pathetic. 


JOSB, MW - Jos. A. Bank Sends Letter to Men's Wearhouse



  • "We, the directors of Jos. A. Bank Clothiers, Inc., are writing in response to your January 30, 2014 letter. After carefully reviewing your offer with our financial and legal advisors, we continue to believe that your offer to acquire Jos. A. Bank substantially undervalues our Company and that your proposal is not in the best interests of our stockholders. Accordingly, we see no benefit in commencing negotiations with Men's Wearhouse."


Takeaway: This is pretty ridiculous. MW said that if JOSB opened discussions it would consider raising the bid. But JOSB is in a state of sheer denial.




BBY - Best Buy lays off 950 Canadian workers; no stores closed



  • "Best Buy Co. Inc. said Thursday that it is laying off 950 of its Canadian employees, the first major cutback since the electronics retailer reported disappointing holiday sales earlier this month."
  • "... the layoffs affected 6 percent of its workforce in Canada and will not result in any store closings. At the end of January a year ago, Best Buy closed 15 stores in Canada. It currently has 265 stores in Canada and had 16,000 Canadian employees before the layoffs."


PVH - PVH Adds Two to Board



  • "PVH Corp. has expanded the size of its board to 14 with the addition of Steven Madden chief executive officer Edward Rosenfeld and Uber Technologies chief financial officer Brent Callinicos as directors."
  • "Rosenfeld has been chairman and ceo of Steven Madden since August 2008. He joined the company in 2005 and was earlier a vice president of investment bank Peter J. Solomon Co."
  • "Callinicos has been cfo of Uber since last September and was earlier vice president, treasurer and chief accountant of Google Inc."


WMT - Wal-Mart Challenges Labor Board's Complaint



  • "Wal-Mart Stores Inc. told the National Labor Relations Board that it was within its rights when it disciplined workers for taking part in short strikes, setting up a legal test of a phenomenon that is reshaping relations between companies and labor."
  • "In a filing last week that responded to a complaint brought by the labor board, Wal-Mart argued those intermittent job actions are hard to distinguish from absenteeism and it was defending its legitimate business interests when it warned strikers it would enforce its policies about being away from work."


DXLG - Destination XL Group Names Board Member John Kyees as Interim CFO -- Expands Board with Election of Will Mesdag as Director -- Provides Update to Fiscal 2013 Financial Guidance



  • "Destination XL Group, announced the resignation of its Executive Vice President, Chief Operating and Chief Financial Officer, Dennis Hernreich, and the appointment of Board Member John E. Kyees as Interim Chief Financial Officer. In addition, the Company announced that it has elected Will Mesdag, 60, to its Board of Directors."
  • "The Company expects earnings per share for fiscal 2013 to be a net loss in the range of $(0.11) to $(0.13) per share compared with previous guidance of a net loss of $(0.05) per share.  The guidance excludes severance and post-employment benefits charges.  Sales for fiscal 2013 are expected to approximate $388.0 million, compared with the Company's previous guidance of $395.0 million."
  • "For the fourth quarter and fiscal year 2013, comparable sales for the Company are expected to increase approximately 3.9% and 2.9%, respectively, from the prior-year period. The increase in comparable sales for fiscal 2013 was previously expected to be approximately 5.0%." 


TBAC - Tandy Brands plans to liquidate assets to pay off lenders



  • "After years of financial and operational losses, Dallas-based Tandy Brands Accessories Inc. plans to sell its remaining assets to pay off $29 million in debt."
  • "The company's lender, Salus Capital Partners LLC, notified the company on Tuesday it would dispose of the collateral following the default on Tandy Brands' $29 million loan."







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February 3, 2014

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Game Day

“Welcome to game day… Now it’s real. The score counts. And you either win or lose.”

-John Hamm


That’s how golf and life coach John Hamm opens Part Two of Unusually Excellent: Competence – Leading on the Field With Skill. Russell Wilson did just that last night. Seahawks 43 vs. Broncos 8.


Credibility, Competence, and Consequence – per Hamm’s framework, that’s the epicenter of leadership skill. And since I can’t argue with that, I like it.


Note that in this game there is no credibility in A) cheating and/or B) making a few big “calls.” Credibility is scored in our profession by repeatable processes. If you can score in both up and down markets, you win. So let’s get at it this morning and try to do more of that.


Back to the Global Macro Grind


What’s winning so far in 2014 is not what was winning for most of 2013. That’s because:


A)     Global Inflation is no longer deflating, it’s re-flating

B)      Growth (particularly in the US and across most of Asia) is slowing, not accelerating


On the Asian #GrowthSlowing scene, China’s manufacturing PMI came in at 50.5 (which is a six month low) and non-manufacturing PMI came in at 53.4, lowest reading since December 2008.


All of this, of course, will be reported to you by the ultimate lagging indicators (your central bankers and consensus economists paid by Big Government), on a lag. So keep it here, where Game Day happens every morning at 4AM.


In terms of our Top Global Macro Theme for Q114, #InflationAccelerating:

  1. CRB Commodities Index (19 Commodities) = +0.3% last wk to +1.1% YTD (vs SP500 -3.6%)
  2. CRB Commodities Foodstuff Index = +1.1% last wk to +3.3% YTD
  3. Corn +1.0% last wk to +2.8% YTD
  4. Cocoa +4.3% last wk to +7.5% YTD
  5. Coffee +9.4% last wk to +13.1% YTD

So we hope you enjoyed flipping out of some of that long-term Starbucks (SBUX) idea and into some CAFÉ (the coffee ETN). One’s price is winning YTD; one’s is losing.


On the #GrowthDivergences front (Hedgeye Macro Theme #2) YTD:

  1. Russell2000 (IWM) -2.8% vs. Utilities (XLU) +2.98%
  2. Emerging Markets (MSCI Equities Index) -6.6% vs. Europe (EuroStoxx600) -1.7%
  3. Japanese stocks (Nikkei) -10.3% vs. Danish stocks (Copenhagen Index) +5.2%

In other words, being long inflation expectations (particularly via breakevens or food inflation) is crushing it YTD, and so is being long European Equity exposure relative to the slowing growth exposures you could be long in the USA or Japan.


That’s not to say that the score may not continue to trend this way. You can make that change in momentum bet this morning if you’d like. You could have doubled down on the Denver Broncos when they were down 22-0 last night too.


Competence in risk management starts the way Seattle started last night; with their defense scoring a safety! Not getting scored on in this game is easily the best way to win. If your shorts can generate positive P&L, all the better.


From a Style Factoring perspective in US Equities, here’s what’s getting lit up like Denver’s defense did:

  1. Consumer Discretionary Stocks (XLY) -1.1% last wk to -6.0% YTD
  2. High Beta Stocks (by S&P quartile ranking in our model) -4.5% YTD
  3. High Short Interest Stocks (again, by quartile) -4.1% YTD

In other words, if you’re overweight any of these Style Factors in a US Equity only portfolio, that’s bad. This is what we call a bullish to bearish reversal in big beta!


But as the game goes on, the score makes more and more sense. With #InflationAccelerating, who gets hurt the most? The Consumer. But don’t tell the Fed that. If growth continues to slow, Janet Yellen’s 1st move will probably be to stop tapering (i.e. devalue the Dollar) and perpetuate more purchasing power pain on The People.


If you don’t like that game recap, go buy another house – and like it. Because, like Barney Frank, Janet Yellen is big on housing, irrespective of it being the mother of all bubbles that got the US consumer into this savings mess to begin with.


Got Savings? At 3.9% (current US Savings Rate as a % of Disposable Income – see Chart of The Day), Americans are once again dipping into those in order to keep up with their over-spending neighbors (and the government’s understated cost of living).


But no worries, Game Day for the government will include some cochamamy narrative about “inequality” in America while they dream up the next currency devaluation policy to encourage The People to lever up again. If they go for it, the score of that policy will count too – and this time the Keynesians will lose as big as the Broncos did.


Our immediate-term Risk Ranges are now (Our Top 12 Global Macro Ranges are in our Daily Trading Range product):


Nikkei 142

VIX 15.89-20.41

EUR/USD 1.35-1.37

NatGas 4.57-5.41

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Game Day - Savings Rate


Game Day - val55

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%