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TODAY’S S&P 500 SET-UP – February 19, 2014

As we look at today's setup for the S&P 500, the range is 41 points or 1.83% downside to 1807 and 0.39% upside to 1848.                                               










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.39 from 2.41
  • VIX closed at 13.87 1 day percent change of 2.21%

MACRO DATA POINTS (Bloomberg Estimates):


• 7am: MBA Mortgage Applications, Feb. 14, est. -2.0%

• 7:45/8:55am: ICSC/Redbook weekly retail sales

• 8:30am: Bureau of Labor Statistics issues redesigned PPI

• 8:30am: Housing Starts, Jan., est. 950k (prior 999k)

• 11am: Fed to purchase $1b-$1.25b in 2036-2044 sector

• 11:30am: U.S. to sell $32b 4W bills

• 12:15pm: Fed’s Lockhart speaks on economy in Macon, Ga.

• 1pm: Fed’s Bullard speaks in Washington

• 2pm: Fed releases minutes from Jan. 28-29 FOMC Meeting

• 4:30pm: API weekly oil inventories

• 7pm: Fed’s Williams speaks on economy in New York



    • President Barack Obama holds press conf. with Canadian Prime Minister Stephen Harper, Mexican President Enrique Pena Nieto


  • China cuts Treasury holdings by most since 2011 amid Fed taper
  • Canadian Natural buys some assets of Devon Canada for C$3.13b
  • BlackBerry CEO chides T-Mobile for promoting switch to iPhones
  • Blackstone buys stake in Senator as Hill targets hedge funds
  • Ranbaxy, Teva agree to settle New York antitrust drug Claims
  • Las Vegas Sands says hackers breached co.’s internal drives
  • EBay CEO Donahoe says PayPal is stronger as a unit
  • Fed foreign-bank capital rules positive for insurers: Seiberg
  • Credit Suisse waits for $11b answer in N.Y. fraud suit
  • Verizon Communications to issue 1.27b shrs to Vodafone holders
  • Buffett’s Coca-Cola complacency warning foretells troubled year
  • Mexico to push ahead on broadcast-TV rules after legal decision
  • Tribune sees $325m benefit in public publishing co.: L.A. Times
  • Netflix says Jan. speed dropped 14% on Verizon’s FIOS: WSJ
  • Investment Technology Group may buy Nyfix From ICE: WSJ


    • Cimarex Energy (XEC) 6am, $1.41
    • Devon Energy (DVN) 7am, $1.08 - Preview
    • Eaton Vance (EV) 8:35am, $0.59
    • Garmin (GRMN) 7am, $0.62
    • Health Care REIT (HCN) 7:30am, $0.16
    • Hecla Mining (HL) 8am, $0.00
    • Host Hotels & Resorts (HST) 6am, $0.31
    • Lumber Liquidators (LL) 7am, $0.72
    • Medicines Co (MDCO) 7am, $0.12
    • MGM Resorts Intl (MGM) 8am, $(0.01)
    • Navios Maritime (NM) 7:45am, $(0.09)
    • Omnicare (OCR) 7am, $0.90
    • Sherritt Intl (S CN) 7:42am, C$0.01 - Preview
    • Six Flags Entertainment (SIX) 8am, $(0.22)
    • SunEdison (SUNE) 6am, $0.17
    • Wabtec (WAB) 8:10am, $0.79


    • Allegion (ALLE) 5pm, $0.59
    • Arris Group (ARRS) 4pm, $0.46
    • Avis Budget Group (CAR) 4:15pm, $0.12
    • Coeur Mining (CDE) 5pm, $(0.18)
    • Concho Resources (CXO) 4:30pm, $0.95
    • Energy Transfer Equity (ETE) 5:10pm, $0.32
    • Energy Transfer Partners (ETP) 5:05pm, $0.58
    • Equinix (EQIX) 4:01pm, $0.79
    • Finning Intl (FTT CN) 4:30pm, C$0.54
    • Goodrich Petroleum (GDP) 4:44pm, $(0.47)
    • HealthSouth (HLS) 4:15pm, $0.42
    • Helix Energy Solutions (HLX) 5:30pm, $0.32
    • HomeAway (AWAY) 4pm, $0.13
    • HudBay Minerals (HBM CN) 5:09pm, C$0.02 - Preview
    • Iamgold (IMG CN) 5:04pm, $0.04
    • Jack in the Box (JACK) 4:01pm, $0.66
    • LifeLock (LOCK) 4:05pm, $0.21
    • Marriott (MAR) 4:30pm, $0.49
    • Millennial Media (MM) 4:05pm, $(0.01)
    • Penn Virginia (PVA) 4:03pm, $(0.03)
    • Questar (STR) 4:10pm, $0.37
    • Safeway (SWY) 4:05pm, $0.48 - Preview
    • Sunoco Logistics Partners (SXL) 4:02pm, $0.65
    • Synopsys (SNPS) 4:05pm, $0.52
    • Tesla Motors (TSLA) 4:01pm, $0.26 - Preview
    • Trinity Industries (TRN) 4:01pm, $1.42
    • Williams (WMB) 4:05pm, $0.21
    • Williams Partners (WPZ) 4:05pm, $0.40


  • Mercuria Said in Discussions With China’s SDIC to Sell Stake
  • WTI Oil Rises for Second Day as U.S. Chill Erodes Fuel Supplies
  • Sugar Crop Tumbling to Four-Year Low in India May Cut World Glut
  • Nickel Reaches Three-Week High on Buying to Close Bearish Bets
  • Gold Holds Below 3-Month High as Buying Slows Before Fed Minutes
  • Soybeans Near Two-Month High on U.S. Exports, Brazil Drought
  • Sugar, Coffee Decline After Rally on Brazil Dryness; Cocoa Falls
  • Rebar in Shanghai Advances on Spring Restocking Speculation
  • Commodities Revenue at Top 10 Banks Declined 18% Last Year
  • Rice Rout Seen Extending as Thai Sales Quicken: Southeast Asia
  • Arabica Coffee Climbs 2.8% in New York, Erasing Earlier Decline
  • EU Gas to Extend Bear Market on Mildest Month Since ’08: Energy
  • Australia Freight, Currency Advantage Delivers China’s Iron Ore
  • Natural Gas Rises to Four-Year High as Inventories Seen Falling


























The Hedgeye Macro Team














February 19, 2014

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The 6 gambling license holders may not be granted a renewal period of 10 years or more.  According to authoritative sources, because 3 of those 6 licensed are US-owned, the central government will be more focused on Sino-US relations.  This could be a deciding factor in giving licenses with a shorter period (e.g. 5 years).  One source said each of the 6 concessionaries will have their licenses renewed in 2020 and in 2022, and no new licenses will be issued.

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

Do You Wish To Find Out?

This note was originally published at 8am on February 05, 2014 for Hedgeye subscribers.

“What we need is not the will to believe, but the wish to find out.”

-William Woodsworth


I know. I’m going all #behavioral on you this year. When combined with #history and #math, it gives me an edge. And god knows, I’m not the smartest player in this league – so I need one!


The aforementioned quote comes from the introduction in the latest #behavioral book we’ve been discussing in the office, Counterclockwise, by Harvard Applied Psych professor, Ellen Langer.


Langer’s research is unique in that she was really one of the first women (1st woman to ever get tenure in Psychology @Harvard) to break the ice on a lot of topics that make us think about how we think. Her most popular book was Mindfulness in 1989. She wrote Counterclockwise in 2009 and it’s relevant to how you think about your risk management day.


Back to the Global Macro Grind


Do you wish to find out why almost every major macro position that was working for you last year sucks for 2014 YTD? If I needed to believe that the Japanese-burning-currency thing was going to work, I could – but I’d be losing a lot of money on that.


Last night’s pathetic bounce in Japanese Equities (Nikkei +1.2% to -12.9% YTD) tells you all you need to know about Japanese consensus – all the locals (brokerage clients getting margin calls) were short Yen and long Mothers (as in the index Japanese dudes lever up on).


Most of Wall Street was in the same trade too. It was only 1 month ago today that the CFTC (futures and options) net short position in Japanese Yen hit all-time highs (-135,000 net short position in terms of contracts). This morning that net short position is -89,420 contracts.


Next to short Yen, what have been the other major consensus long/short positions in Global Macro options?

  1. LONG Oil – 3 month average = +363,977 net LONG contracts
  2. LONG SP500 (Index + E-mini) – 3 month average = +78,356 net LONG contracts
  3. SHORT US Treasuries – 3 month average = -115,078 net SHORT contracts

And how’s that going YTD?

  1. Brent Oil = DOWN -4.2% YTD (vs the CRB Commodities Index +2.5%)
  2. SP500 = DOWN -5.0% YTD
  3. 10YR US Treasuries = UP (with yields -13%, or 40 bps YTD)

Why? Do you want the answer that consensus needed to believe on December 31, 2013, or do you wish to believe what Mr. Macro Market is telling you about growth (hint: on the margin, with #InflationAccelerating, US growth is slowing)?


And it’s not just a USA thing. As you can see in our Chart of The Day (where we show “Hard Growth Comps” for countries versus “Easy Comps”), Japan and the United States were setting up to slow from their 2013 momentum peaks irrespective of this US weather.


Oh, and by the way, the weather on the Merritt in Connecticut this morning isn’t what the dude in Tokyo is dealing with via his margin calls. Japan actually just reported a 16 year low in wages. When his government has a Policy To Inflate the dude’s cost of living, that is not good!


How does the Burning Your Currency thing work again?

  1. Government prints lots and lots of moneys
  2. Currency goes down, and purchasing power of The People goes down
  3. Real (inflation adjusted) consumption growth slows

Then pop a “consumption tax” on your people (Japan’s is pending) and what people who need to believe about “Abenomics” (that it’s good because the stock market was going up) isn’t aligned with what politicians “wish to find out” about economic reality.


Back to the wage inflation (or deflation) thing, I’ll show you what’s going on in the USA on our US Economics Flash Call this morning at 11AM EST. After seeing big time pressure on wages throughout the 2008 crisis, aggregate private sector wages are actually tracking up +5% on a 2-yr comp basis. .  If you need dial in details for the call, email sales@hedgeye.com.


I know your run of the mill academic doesn’t model the US economy how we do (we model it on a 1, 2, and 3 yr comparative basis so that we don’t get run-over by changes on the margin in trends), but that’s cool. It seems to work.


What seems to be a developing bearish to bullish reversal in a @Hedgeye TREND may not turn out to be a long-term reality. But can you afford to miss 3, 6, and 12 month accelerations and decelerations in big macro stuff like growth and inflation?


We can’t. And that’s all I have to say about that.


Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TRENDs, bullish or bearish, in brackets):


SPX 1735-1782 (bearish)

Nikkei 14036-15004 (bearish)

VIX 15.49-21.63 (bullish)

USD 80.78-81.43 (neutral)

Gold 1239-1274 (bullish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Do You Wish To Find Out? - GDP Comps


Do You Wish To Find Out? - 556

EHTH: Thoughts into 2014 Guidance

Takeaway: We remain the bear on EHTH's 2014 prospects. If 2014 guidance isn't light on the initial release, we believe it will have to cut in 1Q14.


  • 4Q13 IFP application metrics are mostly churn
  • Attrition risk not being considered
  • 2014 to disappoint, 2015 setup is worse



We continue to expect 2014 guidance will disappoint on the release.  There are too many headwinds facing the company, and consensus has gotten ahead of themselves in terms of 2014 growth expectations.  We can send you our prior notes and our blackbook if you would like more detail.  


At a meeting with another sell-side firm in January, EHTH management suggested that guidance will include caveats, which we suspect means it will be issued in a wide range, with the top end potentially beating consensus estimates.  If that is the case, it could perpetuate the ACA growth narrative, and push the stock higher in the near term.  However, if management chooses to guide high on the 4Q13 release, we believe it will have to cut on the 1Q14 release.  




Management suggested that it is expecting another wave of applications before the March 31st Open Enrollment deadline, which is why we suspect EHTH could guide higher than it should.  While possible, we have yet to see any surge in demand three weeks into February.  Health Insurance search traffic has steadily waned ever since Open Enrollment began on 10/1/13, and is now at its lowest point since Open Enrollment began  


EHTH: Thoughts into 2014 Guidance - EHTH   Health Insurance Demand weekly 2 18 14 


Even if demand picks up into the final Open Enrollment deadline, it doesn't mean EHTH will see a proportionate share of applications.  EHTH is gradually losing whatever competitive edge it had over the public exchanges.  Three things to consider

  1. EHTH can't sell subsidized plans in the 15 states running their own exchange
  2. EHTH hasn't been able to sell subsidized plans in the states where it is allowed to do so, due to technical issues with the federal site according to an interview with EHTH's CEO on 2/11/14 (link).
  3. Functionality on the government exchanges has steadily improved; making them a more formidable competitor and the only option for subsidized plans

In summary, if guidance surprises to the upside, we suspect it would be more wishful thinking than anything else. We believe management would be setting themselves up for disappointment later.  We remain short into the 4Q13 earnings release this Thursday (2/20/13).



Hesham Shaaban, CFA


WWW: Smoke & Mirrors

Takeaway: Not a good 4Q, but we already knew that. People are freaking over guidance. They should. It’s bad. But it’s a big sandbag.

Conclusion: We’re one of the few bulls on WWW, and we heard absolutely nothing that shakes our confidence in this story. We continue to believe (regardless of guidance) that WWW will print outsized revenue growth at an incremental margin nearly 2x the company average as it scales its newer brands over its superior Int’l infrastructure and de-levers along the way. We’re modeling $1.78 and $2.28 in 2014 and ’15, respectively, with ultimate earnings power of $4.18 out in 2018, which is roughly 50% above the consensus.  This stock used to be expensive, with earnings catalysts. Now it’s cheap with the same catalysts. Our full thesis and model highlights are outlined below.





WWW’s fourth quarter print was a lot more tame than the stock price would otherwise suggest. The company beat estimates by $0.02, though admittedly it was on a weak-ish growth algorithm (revenue and EBIT both flat organically, with taxes helping).  Listening to the company’s prepared remarks, it was clear to us that these guys have such a firm grasp on their portfolio. They get it. That’s such a rarity in the US retail space. Unfortunately, their guidance is perennially conservative, and few people choose to see through it. As painful as this event is, we think it sets up a series of earnings beats throughout the remainder of the year. 


We think that there are a few points that are critical in contextualizing WWW’s performance this quarter, and in modeling the upcoming year.  


1) Guidance: We so rarely spend so much time on guidance, but with this company, it matters. It gave better definition to FY guidance -- 3-6% top line and 10-14% EPS. Acceptable in the context of where they already came out at ICR, but below where the Street is published. That in itself was probably not enough to hit the stock.   But just before the Q&A when CFO Grimes discussed that the first quarter would have down revenue and EPS, the stock lost its bid almost immediately.  Are there issues around this quarter?  Weather, the economy, weather -- of course there are. But this seems a bit severe to us. Either a) something has changed fundamentally, b) weather is beating the heck out of this company, or c) WWW is being overly conservative with its forecast.


As hard as we try – at least with the information we have -- we can’t find anything that leads us to think that this story has changed over the past 8-weeks. Weather is probably a bit of a factor – especially since 25% of its sales come from a summer brand like Sperry. But let’s consider guidance for a minute. Over the past 5 years, WWW has, without fail, taken a substantial whack out of guidance at the beginning of each year. And EVERY year, the company has come back and earned something higher than where guidance was in the first place.  That’s evidenced in the chart below. We think this is what we’re looking at today. 


WWW: Smoke & Mirrors - WWW guidance


2) Seasonality: Furthermore, seasonality is counting against this story in a very big way. In every single year over the past five, you did not want to own the name at the start of the year. This one is obviously no exception. Is it because of weather, or retail trading patterns? We think NO and NO. The reality is that this is the time of year when the company gives earnings guidance. And as noted above, guidance is ALWAYS weak. As the year progresses, the Street miraculously realizes that both top line and EPS growth is far better than they initially expected (because they initially did nothing other than plug the company’s guidance into their models). The chart is a bit ugly (Bloomberg) but the patterns are very clear.


WWW: Smoke & Mirrors - WWW seasonality


3) Sentiment. Plain and simple…sentiment stinks. When we’re faced with conservative initial guidance at the start of the year, only 1 out of 14 analysts being positive on the name, and short interest near historical highs, it’s usually not very good news over the near-term. Seriously, one of the only names that has lower sentiment scores out of the 135 retail names we track is JC Penney.


WWW: Smoke & Mirrors - WWW sentiment



4) Why do we have higher confidence in 2014? Let’s take a step back and look at the PLG acquisition.


2012 was the year of the deal. It was big, and painful initially – no EBIT and interest from $1.2bn in debt.


2013 was the year of integration. In 1H they moved people around, repositioned the brands, and realigned management.  Then in 2H the chessboard was largely set, but they had to seal the deal with an SAP implementation, which went without a hitch.


2014, in our view, is the year of revenue growth. They have four new major tools in their toolbox, and the global salesforce (the most efficient footwear operation on the planet) finally gets to sell them. They’ve been getting international distribution arrangements in place over the past year. And while they strike new ones every day, each of them is cumulative (i.e. signing three per month means that by now there are over 40). Aside from each of those arrangements getting more productive, there’s still another 150 that could be added by our estimates.  


5) Double standard? OK, here’s a nitpick. But how come in the summer when Sperry is crushing it and Merrell is sucking wind, all everyone talks about is that ‘Merrell is over’. But now that Merrell has come roaring back – even without the full contribution yet from Gene McCarthy, all anyone talks about is how Sperry (a warm weather brand) is down (in what might be the worst winter on record). Yes, Sperry is important – and we think it has another $300-$400mm worth of growth ahead of it. But it’s not WWW’s biggest brand. Yes, that distinction belongs to Merrell, and even as Sperry succeeds, it will probably always be number 2.



This is the most global footwear company in the world (legacy WWW). It sells about 65% of its units outside the US, and has seamless and sophisticated systems (SAP) such that all distributors speak the same language. The PLG brands, which we think are better quality overall, sell only 5% overseas, and that's simply because its former owner (Collective Brands) spent capital first on Sperry, then on US Payless stores, and did not have anything left in the kitty for international distribution of PLG brands. So now WWW can scale this superior content over its existing lean/mean infrastructure. We think it will drive an incremental $2bn in revenue over 5-years and an extra 400bp of margin. In the end, we get to earnings power of about $4.30, which is 50% ahead of what management guided at its recent analyst meeting. We're the first to admit that WWW probably won't make you rich here, as it will likely take a good 4-5 years to double. We'd admittedly rather get more aggressive on a pullback. But we know people who have been waiting for a pullback for the last 50%. In the meantime you're paying a high-teens multiple for mid-20s EPS growth -- and this company has one of the best track records of anything in consumer.


WWW: Smoke & Mirrors - WWW financials 2 18



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