TODAY’S S&P 500 SET-UP – March 20, 2014

As we look at today's setup for the S&P 500, the range is 29 points or 0.63% downside to 1849 and 0.93% upside to 1878.                                       










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.35 from 2.35
  • VIX  closed at 15.12 1 day percent change of 4.13%

MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Initial Jobless Claims, March 15, est. 322k (prior 315k)
  • Continuing Claims, March 8, est. 2.880m (prior 2.855m)
  • 9:45am: Bloomberg Economic Expectations, March (prior -3)
  • Bloomberg Consumer Comfort, March 16 (prior -27.6)
  • 10am: Philadelphia Fed Business Outlook, March., est. 3.2 (prior -6.3)
  • 10am: Freddie Mac mortgage rates
  • 10am: Existing Home Sales, Feb., est. 4.60m (prior 4.62m)
  • Existing Home Sales m/m, Feb., est. -0.4% (prior -5.1%)
  • 10am: Leading Indicators, Feb., est. 0.2% (prior 0.3%)
  • 10:30am: EIA natural-gas storage change
  • 2:40pm: President Obama at Valencia College in Orlando, Fla. for economy event
  • 4pm: Fed releases Dodd-Frank stress test results


    • 8:25am: Marriott CEO Arne Sorenson, Hilton CEO Christopher Nassetta attend Economic Club of Washington, D.C
    • 9:45am: House Democratic Leader Nancy Pelosi holds press conf.
    • 10am: Federal Energy Regulatory Commission holds open meeting
    • U.S. Election Wrap: Obama in Florida, FEC deadline for filings
    • Obama in Fla. to deliver speech on U.S. economy 2:40pm


  • Fed releases CCAR/Dodd-Frank stress test results 4pm
  • Ukraine’s interim PM warns of Russian escalation in east
  • U.S. cos. with Russia ops urged to update evacuation plans
  • Search for Malaysia jet advances as objects spotted in ocean
  • GM sued in California over ignition switch defect
  • Starbucks to expand evening alcohol sales to 1,000s of stores
  • Boeing oversight of 787 contractors faulted by FAA
  • JAL, JetBlue to increase number of codeshare flights
  • IMF says Greek banks may need more capital than ests. show
  • Europe’s CHMP concludes monthly mtg


    • AAR (AIR) 4:05pm, $0.48
    • Cato  (CATO) 7am, $0.13
    • ConAgra Foods (CAG) 7am, $0.60
    • dELiA*s (DLIA) 4:05pm, NA
    • IHS (IHS) 6am, $1.25
    • Lennar (LEN) 6am, $0.28 - Preview
    • New Residential Investment (NRZ) 6am, $0.17
    • NIKE (NKE) 4:15pm, $0.72 - Preview
    • Silver Wheaton (SLW CN) 5:06pm, $0.24
    • Wet Seal (WTSL) 4:05pm, ($0.24)


  • WTI Trades Near $100 After Cushing Stockpiles Drop; Brent Steady
  • El Nino Probable by July for MDA as Temperatures Warm in Pacific
  • Gold Trades Near 3-Week Low as Fed Outlook Weighed With Ukraine
  • Copper as Economy Sage Fails as Growth Defies Slump: Commodities
  • Coffee Falls as Brazil Rains Prompt Fund Sales; Sugar Declines
  • Copper Falls First Time in Five Days on Fed Rate Outlook, China
  • Wheat Retreats as Advance to 10-Month High Seen Curbing Demand
  • JPMorgan Ranked No. 1 in Commodities in 2013 With Goldman No. 2
  • Rubber Posts Biggest Weekly Drop Since January on China Slowing
  • Wildcatters Rush Spindletop in Return to East Texas Oil: Energy
  • Margarita Fans Miffed as Mexican Lime Growers Squeeze Supply
  • Wrong Fuel Seen Extending Worst Europe Refinery Rout Since 1980s
  • Domestic Chinese Iron Ore Reaches Multi-Year Low, SGX Holds on
  • Russian Asia Oil Exports to Grow at Europe Expense, Rosneft Says

























The Hedgeye Macro Team














NKE: Good Qtr, Bad Risk Profile

Takeaway: NKE at $70 had everything going right. Near $80 it’s all about top line. No room for error. Good Q, but we just don’t like the risk profile.


We don’t have a strong opinion on NKE headed into its print on Thursday, which is a rarity for us.  As background we turned somewhat cautious on Nike coming out of last quarter for a couple of reasons.


  1. First is that we’re still not sold on the management transition at the company. We don’t like the circumstances that led up to the changes, and we’re not convinced that the right people are in the right places. That’s a bold statement in that Nike is all about people. And it’s success over the years has been driven by consistently putting the right people in the right roles. Some recent moves are a slam dunk (like putting Eric Sprunk in charge of operations), but others are not. We fully acknowledge an important point – that our opinion on who is doing what inside Nike is not very relevant. The opinion that matters is that of the employees who have acclimated to their new bosses. And our concern is that THEY are not sold on the new management team anywhere near to the extent that they were a year ago. Another thing we acknowledge is that management transitions in a company as big and complex as Nike take years to play out – either good or bad. None of our concerns will manifest in any way as soon as this quarter. But we remain concerned about solidarity throughout the organization.
  2. The second, and more pressing (near term) reason is that the Nike story six months ago had three massive pillars of support; 1) Severe Brand heat – with futures and revenue both accelerating, 2) Improving Gross Margins, and 3) Slowing inventory growth. That’s a trifecta that makes Nike pretty much bullet proof. But today, we have a) Gross Margins turning from a tailwind to a headwind, and b) Inventories growing above the rate of sales. In effect, it lost two of its three pillars of support.  The positive is that the Brand is still on fire – both here and in Europe. That’s the most important pillar, thankfully. But there’s no question that the margin of error for Nike is dramatically tighter now than it was heading into last Fall.


So we’re looking at one longer-term concern – that won’t play out now – and a near-term concern that will likely be masked by the fact that revenue momentum remains so strong. And let’s face it, there’s not a long list of companies that are clobbering the competition like Nike is today – so on a relative basis, which is where many investors live, this one ain’t too shabby. So in the end, this will likely be a decent-enough print. But in the fall when NKE was a $70 stock it had everything going its way. Now it’s nearly an $80 stock, only one thing is going its way, and not much else can go wrong. We just don’t like the risk profile.



Here are some questions we have into the quarter:


1) North America vs The World: Without question, the North American region has been carrying the company for the past two years. Europe kicked in to high gear last quarter and began to shoulder some of the Global Futures growth. That was great to see. That trend needs to sustain itself for Nike to maintain a 10%ish growth rate on the top line. We’d really like to see better consistency out of Emerging Markets (though we guess that once they’re consistent, they will no longer be ‘emerging’) and a meaningful step-up in China.  

NKE: Good Qtr, Bad Risk Profile - NKE futures


2) Gross Margins: We know that the company is facing input cost pressures, but the way we see it cost pressures were easing (mostly over the past year) and at the same time the company had a great two-year run in taking up price in footwear. Can it take up price further to offset the higher raw materials, or will they have to ‘eat it’ for another three quarters while raw materials go against them? Inflation is definitely not going down.  


3)SG&A Spending: Very rarely have we EVERY questioned Nike on SG&A spend. The reality is that – despite splurges when it was in its younger days – Nike has grown up to be an extremely reliable and proficient steward of capital. But we question the recent signing of Jonny Manziel, who is taking home a reported $20mm annually. After blowups that Nike had with athletes like Lance, Kobe, and even the (once) squeaky clean Tiger Woods, we’re surprised that it is rolling the dice on someone that is not particularly likable and poses significant ‘blow-up risk’. Nike prides itself in paying up for what it calls ‘crossover athletes’ meaning that they could be on the cover of Sports Illustrated and Vogue/GQ in the same month. Not quite sure that Manziel is that kind of guy. While that might be nitpicking on one small asset in the context of a company that has $3.6bn in minimum obligations against endorsement deals in the coming 5-years, we should also note the recent deal with Manchester United. The company recently re-upped its 10-year ManU deal at a premium that stunned us. The company had been spending £23mm annually – an amount that now goes up to £60mm. We could understand if the team became meaningfully stronger in recent years, but unfortunately the reverse has happened. Nike is paying nearly 3x for a lesser team. Hopefully there are parts of this deal that we are not privy to that justifies the expense. We certainly hope that Nike will elaborate on both on the call.   


4) FlyKnit – Changing the Conversation: As cool as the FlyKnit kicks are, we want to start hearing more about a few things a) unit cost savings per pair (which they won’t provide because then they’ll tell retailers what their real cost is), b) how much Nike saves in inventory costs (raw materials) for a pair of FlyKnits vs traditionally-manufactured footwear, and c) when the production technology will be ready to roll out at retail, so consumers could order FlyKnit NikeID product in a store, then go get a burrito at the foodcourt, and come back an hour later and the product is created, fully customized, and ready to take home. Once they nail down that capability (something they’ve quietly been working on for four years) we’ll drop every concern we have about this name and pound the table faster than you can say ‘Prefontaine’.


5) Jordan Running: Nike is launching its first running shoe for the Jordan line on May 1. It’s about time…you can buy a Jordan basketball shoe, baseball cleat, football cleat, and golf shoe. Yet not for the largest shoe category of all – running? This is one of the biggest lay-up (no pun intended) opportunities for the Jordan brand we’ve seen in a decade. We’re interested in management’s plans here.


6)Dot.Com: For one of the most powerful brands in the world, Nike has one of the lowest ratios at about 4%. Granted, part of the reason Nike’s Direct business is half the size of UnderArmour’s (as a percent of total) is that its wholesale model is so incredibly powerful. But Nike needs to do a better job articulating its strategy.


NKE: Good Qtr, Bad Risk Profile - NKE sigma

Poll of the Day Recap: Bitcoin Isn't Fit to Rule the Virtual World (Yet)

It seems like everyone and their mom is talking about Bitcoin. There’s the Winklevoss twins, the Mt.Gox debacle, the gossip about who actually created the digital currency, Warren Buffett’s comment that the coin is a “mirage,” and now news today that Fortress Investment Group is entering the fray.


So we wanted to know in our Poll of the Day: Do you have any intention to ever use Bitcoin?


At the time of this post, approximately 67% of respondents said NO and 33% said YES. 


Of the voter comments we received, those who voted NO said that infrastructure was missing, and that it’s “not really useful in any part of my life in the real world.  Maybe if I moved to SimCity...or wanted to launder some drug money.” A commenter also responded, “When merchants universally accept it and it actually has a definable value, then maybe I'd try it. Both of those events won't happen in my lifetime, though.”


One voter asked, “How do you manage risk using the most volatile 'currency' on the planet?”


As for the YES commenters, one person noted that “the Bitcoin protocol platform is relevant and valuable,” and that  “some form of this currency will become mainstream in the next 5-10 years.”


More to be revealed. Expect this media storm to rage on. 


Poll of the Day Recap: Bitcoin Isn't Fit to Rule the Virtual World (Yet) - bitcoin 16x9 1600%20%20%20It%20seems%20like%20everyone%20and%20their%20mom%20is%20talking%20about%20Bitcoin.%20There’s%20the%20Winklevoss%20twins,%20the%20Mt.Gox%20debacle,%20the%20gossip%20about%20who%20actually%20created%20the%20digital%20currency,%20Warren%20Buffett’s%20comment%20that%20the%20coin%20is%20a%20“mirage,”%20and%20now%20news%20today%20that%20Fortress%20Investment%20Group%20is%20entering%20the%20fray.%20%20%20So%20we%20wanted%20to%20know%20in%20our%20Poll%20of%20the%20Day:%20Do%20you%20have%20any%20intention%20to%20ever%20use%20Bitcoin?%20%20%20At%20the%20time%20of%20this%20post,%20approximately%2069%%20of%20respondents%20said%20NO%20and%2031%%20said%20YES.%20%20%20%20Of%20the%20voter%20comments%20we%20received,%20those%20who%20voted%20NO%20said%20that%20infrastructure%20was%20missing,%20and%20that%20it’s%20“not%20really%20useful%20in%20any%20part%20of%20my%20life%20in%20the%20real%20world.%20%20Maybe%20if%20I%20moved%20to%20SimCity...or%20wanted%20to%20launder%20some%20drug%20money.”%20A%20commenter%20also%20responded,%20“When%20merchants%20universally%20accept%20it%20and%20it%20actually%20has%20a%20definable%20value,%20then%20maybe%20I'd%20try%20it.%20Both%20of%20those%20events%20won't%20happen%20in%20my%20lifetime,%20though.”%20%20%20One%20voter%20asked,%20“How%20do%20you%20manage%20risk%20using%20the%20most%20volatile%20'currency'%20on%20the%20planet?”%20%20%20As%20for%20the%20YES%20commenters,%20one%20person%20noted%20that%20“the%20Bitcoin%20protocol%20platform%20is%20relevant%20and%20valuable,”%20and%20that%20%20“some%20form%20of%20this%20currency%20will%20become%20mainstream%20in%20the%20next%205-10%20years.”%20%20%20More%20to%20be%20revealed.%20Expect%20this%20media%20storm%20to%20rage%20on.%20%20CONNECT%20TO%20HEDGEYE.%20%20http:/" class="embedded-content">

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Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

Oversold, Again: SP500, Gold, Bonds

Takeaway: Yellen will allow #InflationAccelerating to continue towards the “committee’s objective", which will, in turn, slow real GDP growth faster.

Both the SP500 and Gold are signaling immediate-term TRADE oversold within bullish intermediate-term TRENDs into the close today. This should come as no surprise as the 30-day inverse correlation between USD (which is signaling overbought) and SPX/Gold is -0.9.


Most of this comes on the heels of another reaction to the Fed’s confused forecast:


“I do want to emphasize that this is a forecast”

-Janet Yellen


Indeed. And her forecasts on growth and inflation are wrong at least 2/3rds of the time.


She’s also saying she’s going to let #InflationAccelerating continue towards the “committee’s objective.” Which will, in turn, slow real GDP growth faster. Then she’ll get bearish on the economy after that.


Hedgeye Playbook says:


  1. Short USD (UUP) on the overbought signal
  2. Buy Gold (GLD) on the oversold signal
  3. Buy Bonds (TLT) on the oversold signal




Keith R. McCullough
Chief Executive Officer


Oversold, Again: SP500, Gold, Bonds - DXY


Oversold, Again: SP500, Gold, Bonds - GOLD


Oversold, Again: SP500, Gold, Bonds - UST 10Y


Oversold, Again: SP500, Gold, Bonds - SPX

Jordan (Finally) Runs! | $NKE

Takeaway: Nike made a good (long overdue) move here.

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


First Look At The Jordan Flight Runner


Jordan (Finally) Runs! | $NKE - Jordan Flight Runner 01

  • "...the Jordan Flight Runner is the Jordan Brand's first-ever running specific model. The innovative runner aims to take comfort and performance to the next level with a Dynamic Fit lacing system and Zoom Air cushioning."
  • "The Jordan Flight Runner is set to officially release May 1st, and will retail for $110."


Now this news item may strike some people as odd. But it actually makes perfect sense. 


The bottom line here is Jordan broke out of being just a basketball brand a decade ago. The NBA is joined by the NFL, MLB, PGA and lacrosse (among other sports) as places where you will find athletes wearing Jordans. 


So why should the Nike sidestep the most popular silhouette in the US? (Yes, that would be running.)  We’re not sure if they’re geared for fashion or to actually run in, but there are two things we know:

  1. This move was long overdue
  2. They will sell. Like hot cakes.

Smart move by Nike here. Long overdue.

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