TODAY’S S&P 500 SET-UP – March 18, 2014

As we look at today's setup for the S&P 500, the range is 20 points or 0.69% downside to 1846 and 0.39% upside to 1866.                       










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.32 from 2.33
  • VIX closed at 15.64 1 day percent change of -12.23%

MACRO DATA POINTS (Bloomberg Estimates):

  • Federal Open Market Cmte begins 2-day mtg
  • 7:45am: ICSC weekly sales
  • 8:30am: CPI m/m, Feb., est. 0.1% (prior 0.1%)
  • CPI Ex Food and Energy m/m, Feb., est. 0.1% (prior 0.1%)
  • 8:30am: Housing Starts, Feb., est. 910k (prior 880k)
  • 8:30am:  Building Permits, Feb., est. 960k (prior 937k, revised 945k)
  • 8:55am: Redbook weekly sales
  • 9am: Net Long-term TIC Flows, Jan., est. $40.0b (pr -$45.9b)
  • 4:30pm: API weekly oil inventories


    • 8am: SEC Chief Economist Craig Lewis speaks at ICI
    • 8:30am: David S. Cohen, U.S. Treasury undersecretary for terrorism & financial intelligence speaks on virtual currencies at Bloomberg event
    • 9am: RNC Chairman Reince Priebus at Christian Science Monitor
    • 10am: DNC Chairwoman Rep. Debbie Wasserman Schultz at Natl Press Club
    • US. Election Wrap:  Illinois Race; Ads by Billionaires


  • Federal Open Market Cmte begins 2-day mtg
  • High-speed trading said to face New York probe over fairness
  • Russia creeps towards economic crisis as sanctions near
  • Malaysia Air disappearance among longest in modern aviation
  • Obamacare reshuffles insurance market share, report says
  • Wal-Mart plans video-game trade-in service March 26
  • Amazon to start selling video-streaming device in April: WSJ
  • Microsoft said to unveil Office for IPad on March 27
  • Target to sell products simultaneously with TV shows: NYT
  • Rep. Camp’s bank tax plan under attack from Wall St.: WSJ
  • Shell, Phillips 66 purchase majority of SPR oil sale
  • Italy may cut F-35 JSF order to 45 vs 90, Corriere says


    • Adobe Systems (ADBE) 4:05pm, $0.25 - Preview
    • Alimentation Couche Tard (ATD/B CN) 8:40am, $0.92
    • DSW (DSW) 7am, $0.29
    • FactSet Research Systems (FDS) 7am, $1.22
    • Hertz Global Holdings (HTZ) 6am, $0.32
    • Oracle (ORCL) 4:01pm, $0.70 - Preview
    • Pacific Sunwear of California (PSUN) 4pm, ($0.19)
    • Renren (RENN) 6pm, ($0.12)
    • Yingli Green Energy Holding Co (YGE) 6am, ($0.18)


  • Gold Extends Retreat From Highest in Six Months Before Fed Meets
  • Gold-Mining ETF Outshines Bullion Fund as Haven Bet: Commodities
  • Brent Trades Near Six-Week Low as Crimea Risk Fades; WTI Steady
  • Nickel Heads for Bull Market as Russia Clouds Supply Outlook
  • Corn Rebounds in Chicago Trading, Erasing Earlier Declines
  • StanChart Sees Global Sugar Deficit in 2014-15 of 1 Mln Tons
  • Ukraine Tackling Gas Corruption Means Potatoes for Poor: Energy
  • Default Risk for China Copper Financing Seen Low: StanChart
  • European LNG Imports Fell to 9-Yr Low in 2013 as Prices Rose: BG
  • French Flour Miller Vivescia Sees Market for Sustainable Wheat
  • April Jet Fuel Swaps Drop to Eight-Month Low: Asia Distillates
  • EU Mulls Renewables-Linked Aid to 62 Industries, Draft Shows
  • Thai Rice Crops Damaged as Drought Spreads Across 28 Provinces
  • Rebar Rises 1st Time in 3 Days on China Seasonal Demand Outlook
  • Agricultural Commodities Could Be “Next Big Story,” HSBC Says

























The Hedgeye Macro Team














LULU: Survey Results Prequel #1

Takeaway: In advance of Round 2 of our LULU Consumer Survey, we’ll be revisiting some of the themes that caused us to turn bearish last fall

In advance of the release of Round 2 of our LULU Consumer Survey on Monday March 24th at 11:00am, we’ll be revisiting some of the themes that caused us to turn bearish last Fall.



As a reminder, we ran our first iteration of the LULU consumer survey in January. The impetus behind the study was to get a better understanding of how badly LULU's 2013 PR gaffes had damaged the brand. Our surveys are run through a third party vendor to ensure that the results are valid both statistically and methodologically, but we are always looking for data points to challenge our findings.



As background regarding our methodology, we should point out that LULU ran a survey similar to our own soon after Chip's comments and were pretty tight lipped about the findings. At ICR the company flashed one image about brand desirability that we poached and compared to our data set (see both charts below). We won't claim that our data set is a carbon copy to LULU's, but the similarities are telling and lead us to believe that LULU must have been looking at the same troubling trends we called out in January prior to the company's 4Q guide-down.


LULU: Survey Results Prequel #1 - LULU data

LULU: Survey Results Prequel #1 - hedgeye data



We’ll be calling out several items throughout this week. But one that we found particularly noteworthy is that there’s a gross disparity in pricing for LULU vs its’ competitors. Specifically, we asked consumers how much a pair of Yoga pants for each of the 17 brands that we used in our survey. The average price for LULU was $67, versus $45 for the rest of the industry. As you can see in the chart below, no other brand comes close. But when we charted the ACTUAL price of Yoga pants for each brand, we see that LULU is not even the highest, and several brands are within $10 of LULU’s $96 average price. The read-through is that the other pants are not materially more expensive, but consumers just think they are. That’s largely a function of discounting. At other stores, a shopper can find a pair of $90 pants, but get 2 for 1. But LULU has no real discounting strategy. Our sense is that in 2014, we’ll see that happen. Let’s see if the next round of our survey shows any improvement in the perceived value proposition.


LULU: Survey Results Prequel #1 - customer price

LULU: Survey Results Prequel #1 - ACTUAL PRICE


More analysis to come tomorrow. 

European Banking Monitor: Russia/Ukraine Divergences

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .




Relative Differences

The Russia/Ukraine/Crimea situation continues driving relative performance differences within the US Financials sector. Note the first callout below. The US global banks are underperforming while the domestically-focused institutions are outperforming, which is essentially the opposite of our preferred positioning. Meanwhile, Sberbank of Russia, which is essentially the Russian banking system, is seeing its CDS rise dramatically. Separately, the yield spread is compressed markedly last week.


If there is one silver lining domestically it is that commodity prices finally stopped going up, posting a 1% decline for the week. It's also worth mentioning that the US and EU interbank markets remain benign. 



European Financial CDS - Swaps mostly widened in Europe last week. Sberbank of Russia widened significantly, increasing 54 bps to 340 bps and finds itself now squarely in the red zone of +300 bps. Sberbank swaps are now wider by 103 bps month-over-month. Consider that Sberbank is to Russian banking what JPMorgan, BofA, Citi and Wells Fargo combined are to the US from a market share standpoint. Sberbank's credit default swaps are a helpful proxy for the Crimea situation.  


European Banking Monitor: Russia/Ukraine Divergences - zbank 1

European Banking Monitor: Russia/Ukraine Divergences - z bank2


Sovereign CDS – Sovereign swaps mostly widened over last week. The two exceptions included the US, which tightened 1 bp and Spain, which tightened 5 bps. 


European Banking Monitor: Russia/Ukraine Divergences - zz. sov1


European Banking Monitor: Russia/Ukraine Divergences - z. sov2


European Banking Monitor: Russia/Ukraine Divergences - z. sov3


Euribor-OIS Spread – The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. The Euribor-OIS spread widened by 2 bps to 14 bps.


European Banking Monitor: Russia/Ukraine Divergences - z. euribor


Matthew Hedrick




Early Look

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The Mall Says it All

Takeaway: A picture is worth a thousand words.

Editor's Note: This is a complimentary research excerpt from Retail Sector Head Brian McGough. For more information on our services, click here.

A Trip to the Mall

You don't often hear from us about our trips to the malls.


We're in there regularly, but the reality is that with about 1,100 malls in the U.S., it's just flat-out dangerous to go into a handful of stores and draw a conclusion.


That said, in a recent mall tour over the weekend, we took a bunch of pictures of things we thought were insightful. It’s not necessarily conclusive given the small sample, but interesting nonetheless.


Here's just a few of our takeaways:



This table of Sperry boat shoes in Lord and Taylor caught our eye in two ways. First, it looked horrible. But that's more to blame on Lord and Taylor. The second was that it was the only footwear display in the entire men's department that was not on sale. That sign on the right? It's marked as 'Everyday Value' at $89.95. 


Boat shoes are not going away.


The Mall Says it All - sperry



We have never, ever seen an athletic shoe store with more SKUs than this Skechers store. Seriously, it was almost painful to see all the models and color combinations.


Also, prominently displayed was its 'Designed for Speed' ad. Let's hope this foray into performance running works for Skechers, because it's been known to churn out a shoe that has a better chance of making your foot bleed than actually completing any marathon.


The Mall Says it All - skechers



Target looked simply horrible. The worst store in the mall. Full stop.


The biggest problem was being out of stock on items in key categories:

  • The two pictures on top show the footwear wall, where they sell vulcanized footwear, slides, and flip flops. 
  • The pictures in the middle were the most alarming, as they show the end-cap in the footwear department. Yes, this is the most valuable real-estate in the whole department, and it was completely barren.
  • The lower left photo shows how Target is getting ready for the spring bike season, which really should have been set a month ago. It was a wall of absolute nothingness.
  • Lastly, there's that picture to the lower right. I have no idea what this is. All I know is that it was painful to the eye. 

The Mall Says it All - target



This Coach store was rather sad. I stood outside waiting for someone to walk in. Total time elapsed was 5 minutes 30 seconds.


And for the record, the mall was otherwise reasonably crowded. 


The Mall Says it All - coach



On our trip to the mall, JCPenney was the anti-Target. Seriously. Everything was the exact opposite from Target. The store was clear, neat, and well merchandised.


The picture to the upper right shows a newly merchandised apparel area for women. It was very well lit, had great signage, and looked extremely inviting. The merchandise was not so bad, either.


Similarly, JCPenney’s footwear department beat Target’s poor showing. The athletic area -- albeit overly supplied with Nike products -- was clean and the product was competitive with what was in the Macy's down the hall. The women’s dress shoe department (shown in the lower right photo) was also world's above what we saw in Target. It was not just in how it was merchandised, but also in presentation and quality of merchandise.


And, one might say that JCPenney should  be well-above Target. Yes, that's true. But in the past, it wasn't.


The Mall Says it All - jcp



The worst thing about the FootAction store is that it was directly across from Abercrombie & Fitch, which soils the air with that horrible-smelling scent.   But we stayed in the FootAction store for a good 30 minutes (and bought something so we wouldn't be kicked out). After some painful accounting, our estimate is that 85% of the SKUs at FootAction are Nike/Jordan. That's simply astounding.


Finish Line had a great looking window, and the retailer is the only athletic store that dared dedicate some of its window space to a non-Nike brand. But we're puzzled that there's a big poster for the Spine footwear product, which is not the new UA footwear on the market (that would be the Speedform Apollo).


The Mall Says it All - footaction


Just Charts: XLP Screens Bullish, Wk 2

Consumer Staples markedly outperformed the broader market last week, falling -0.2% versus the S&P500 at -2.0%. And for a second week, the XLP is bullish on immediate term TRADE and intermediate term TREND durations from a quantitative set-up. This is a material shift as the sector traded bearish TRADE and TREND for the majority of the year-to-date.


Just Charts: XLP Screens Bullish, Wk 2 - chart12


The Hedgeye U.S. Consumption Model is also showing improvement, with 6 of the 12 metrics flashing green.

Just Charts: XLP Screens Bullish, Wk 2 - chart11


Despite an improved outlook for the sector, we continue to believe that the group is facing numerous headwinds, including:

  • U.S. consumption growth is slowing as inflation rises, in-line with the Macro team’s 1Q14 theme of #InflationAccelerating
  • The economies and currencies of the emerging market – once the sector’s greatest growth engine – remain weak with the prospect of higher inflation in 2014 eroding real growth
  • The sector is loaded with a premium valuation (P/E of 19.2x)
  • Less sector Yield Chasing as Fed continues its tapering program
  • The high frequency Bloomberg weekly U.S. Consumer Comfort Index has not seen any real improvement over the past 6 months, but expanded to -27.6 versus -28.5 in the prior week

Just Charts: XLP Screens Bullish, Wk 2 - chart13
Just Charts: XLP Screens Bullish, Wk 2 - chart14


There will be a number of consumer staples companies presenting at CAGE today – March 19th. Click here for the program


Our Best Idea in the sector remains Lorillard (LO). Please email me at if you’d like a copy of the presentation and to listen to the podcast from March 4th.   


Matt Hedrick

Food, Beverage, Tobacco, and Alcohol


Howard Penney

Household Products





Quantitative Setup


In the charts below we look at the largest companies by market cap in the Consumer Staples space from both a quantitative perspective and fundamental aspect where we can offer one.  As you will see over time, sometimes our fundamental view does not align with the quantitative setup (though not often).

BUD – I’ll have another round of bearish BUD beta please! Didn’t take much for this stock to revert squarely back into its Bearish Formation @Hedgeye – TREND resistance = $102.79
Just Charts: XLP Screens Bullish, Wk 2 - chart1

DEO – looks worse than BUD, but both are bearish TREND @Hedgeye with DEO’s TREND resistance firmly intact up at $126.82
Just Charts: XLP Screens Bullish, Wk 2 - chart2

KO – only rallied when the market did, then failed @Hedgeye TREND resistance ($39.58) as the market failed to make new highs
Just Charts: XLP Screens Bullish, Wk 2 - chart3

PEP – looks better than KO primarily because its trading above TREND support of $80.41, albeit barely
Just Charts: XLP Screens Bullish, Wk 2 - chart4

GIS – big correction on a big volume signal late last week; watch TREND support of $49.31 very closely
Just Charts: XLP Screens Bullish, Wk 2 - chart5

MDLZ – still bullish TREND @Hedgeye as long as $33.62 holds
Just Charts: XLP Screens Bullish, Wk 2 - chart6

KMB – still the best looking quantitative setup on this list. We call this a Bullish Formation as it continues to signal a series of higher-lows and higher-highs with TREND support down at $105.95
Just Charts: XLP Screens Bullish, Wk 2 - chart7

PG – having a tough time challenging TREND resistance of $80.56; if it continues to fail there, we’ll remain bearish
Just Charts: XLP Screens Bullish, Wk 2 - chart8

MO – making a serious comeback from the FEB lows; we call this a bearish to bullish TREND reversal @Hedgeye with what was TREND resistance now support at $35.66
Just Charts: XLP Screens Bullish, Wk 2 - chart9

PM – still the dog breath setup of the group; looks nothing like MO as its well below its $83.05 TREND resistance line
Just Charts: XLP Screens Bullish, Wk 2 - chart10

Cartoon of the Day: Alibaba

Cartoon of the Day: Alibaba - Alibaba03.16.2014


China’s Internet giant Alibaba said it would list in New York, and is expected to rank among the largest ever initial public offerings – it could raise as much as $15 billion. One of Alibaba's largest shareholders is Yahoo, which owns 24%.

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