TODAY’S S&P 500 SET-UP – May 6, 2014

As we look at today's setup for the S&P 500, the range is 34 points or 1.52% downside to 1856 and 0.28% upside to 1890.                                                       













  • YIELD CURVE: 2.20 from 2.19
  • VIX closed at 13.29 1 day percent change of 2.94%

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:45am: ICSC weekly sales
  • 8:30am: Trade Balance, March, est. -$40b (prior -$42.3b)
  • 8:55am: Redbook weekly sales
  • 10am: IBD/TIPP Economic Optimism, May, est. 47.9 (prior 48)
  • 11:30am: U.S. to sell $35b 4W bills
  • Noon: DOE short-term energy outlook
  • 1:00pm: U.S. to sell $29b 3Y notes
  • 4:30pm: API inventories
  • 7pm: Discussion with Fed in St. Louis


    • Primaries today in Indiana, North Carolina, Ohio
    • 9:30am: Attorney General Eric Holder delivers remarks at Correctional Workers Week Memorial Service
    • 9:30am: Senate Armed Services Cmte hears from Joint Chiefs Chairman Martin Dempsey and services’ chiefs of staff on military pay
    • 10am: Senate Finance Cmte holds hearing on highway trust fund
    • 10am: Hillary Clinton speaks at Nat’l Council Behavioral Health
    • 1pm: Statoil CEO Helge Lund discusses his strategy at CSIS
    • 3pm: Senate Foreign Relations Cmte hears from Asst. Sec. of State Victoria Nuland on Russia
    • 7pm: Federal Reserve Gov. Jeremy Stein speaks at dinner held by Money Marketeers of New York Univ.
    • U.S. ELECTION WRAP: May Primaries; Buffett on Hillary


  • French President Hollande says GE bid undervalues Alstom
  • Barclays 1Q profit declines more than est. on fixed income
  • Ukraine unrest intensifies as toll rises from East offensive
  • Google to ask U.S. appeals court to throw out $30m Vringo jury verdict
  • Samsung says will challenge Apple patent infringement verdict
  • AstraZeneca chairman asks Cameron to stay bid-neutral: FT
  • Pfizer CEO willing to walk away from AstraZeneca bid: WSJ
  • Investors pushing U.S. banks for cash returns, special divs.
  • Credit Suisse put business probed by U.S. into separate unit
  • Fiat said to start Alfa Romeo model expansion with own funds
  • Sprint matches T-Mobile’s prepaid plan in Son’s price war
  • Coke, Pepsi to remove vegetable oil derivative from drinks
  • N.D. Sen. Hoeven says 3 votes short of Keystone cloture
  • Senate Foreign Relations Cmte meets on Russia, Ukraine
  • Fed Gov. Jeremy Stein speaks at 7pm NYU dinner


    • Akorn (AKRX) 6:00am, $0.15
    • AMETEK (AME) 7am, $0.56 - Preview
    • Arcos Dorados Holdings (ARCO)  8am, $0.02
    • Ares Capital (ARCC) 8am, $0.39
    • Arrow Electronics (ARW) 8am, $1.21
    • BCE (BCE CN) 7am, C$0.76 - Preview
    • Carrizo Oil & Gas (CRZO) 6:30am, $0.40
    • CBOE Holdings (CBOE) 7:30am, $0.56
    • Denbury Resources (DNR) 7:30am, $0.25
    • Dentsply International (XRAY) 7am, $0.56
    • Discovery Communications (DISCA) 7am, $0.71
    • Emerson Electric Co (EMR) 6:30am, $0.81 -Preview
    • FirstEnergy (FE) 8:30am, $0.42
    • George Weston (WN CN) 8am, $0.76
    • GNC Holdings (GNC) 8am, $0.76
    • Henry Schein (HSIC) 7am, $1.13
    • Hillshire Brands (HSH) 7:30am, $0.36
    • HollyFrontier (HFC) 7am, $0.77
    • Intl. Flavors & Fragrances (IFF) 7am, $1.25
    • Isis Pharmaceuticals (ISIS) 8:30am, ($0.24)
    • Magellan Midstream Partners LP (MMP)  8:30am, $0.68
    • Mosaic (MOS) 7am, $0.59  - Preview
    • NRG Energy (NRG) 6:49am, ($0.13)
    • Nu Skin Enterprises (NUS) 7:30am, $0.94
    • Office Depot (ODP) 7am, $0.03
    • Quicksilver Resources (KWK) 7:30am, ($0.07)
    • Radian Group (RDN) 7am, $0.22
    • Rowan Cos Plc (RDC) 8:00am, $0.20
    • Semafo (SMF CN) 8:23am, ($0.02)
    • Towers Watson & Co (TW) 6:00am, $1.48
    • Vantage Drilling Co (VTG) 7am, $0.08
    • Vishay Intertechnology (VSH) 7:30am, $0.18
    • Vulcan Materials (VMC)  8am, ($0.33)
    • Western Refining (WNR) 6:00am, $0.40
    • WestJet Airlines (WJA CN) 6:30am, C$0.63 -Preview
    • Zoetis (ZTS) 7am, $0.37 - Preview


    • Acadia Pharmaceuticals (ACAD) 4:01pm, ($0.13)
    • Activision Blizzard (ATVI) 4:05pm, $0.10
    • Agrium (AGU CN) 6:45pm, C$0.04 - Preview
    • Allstate (ALL) 4:05pm, $1.20
    • Electronic Arts (EA) 4:03pm, $0.11 - Preview
    • FireEye (FEYE) 4:05pm, ($0.53)
    • First Solar (FSLR) 4:05pm, $0.52
    • FMC (FMC) 4:15pm, $0.95
    • Forest Oil (FST) 4:22pm, ($0.02)
    • Frontier Communications (FTR) 4:01pm, $0.06
    • Groupon (GRPN) 4pm, ($0.03) - Preview
    • Iamgold (IMG CN) 5:04pm, $0.02
    • Liberty Global PLC (LBTYA) 5:40pm, ($0.08)
    • Marathon Oil (MRO) 4:03pm, $0.72
    • Matador Resources Co (MTDR) 4:05pm, $0.28
    • Microchip Technology (MCHP) 4:15pm, $0.62
    • Myriad Genetics (MYGN) 4:05pm, $0.45 - Preview
    • Oneok (OKE) 4:05pm, $0.37
    • Pioneer Natural Resources Co (PXD) 4:05pm, $1.06
    • Prospect Capital (PSEC) 4pm, $0.32
    • Qiagen NV (QGEN) 4pm, $0.22
    • Sun Life Financial (SLF CN) 5:10pm, C$0.66 - Preview
    • Trimble Navigation (TRMB) 4:02pm, $0.42
    • TripAdvisor (TRIP) 4:02pm, $0.54
    • Veresen (VSN CN) 4:22pm, C$0.05
    • W&T Offshore (WTI) 5:20pm, $0.21
    • Walt Disney (DIS) 4:15pm, $0.95 - Preview
    • Whole Foods Market (WFM) 4:03pm, $0.41
    • Zulily (ZU) 4:05pm, $0.00



  • Brent Rises as Russia and Europe Discuss Ukraine; WTI Advances
  • El Nino Alert Signals Drought, Flood Risks for World’s Farmers
  • Crop ETFs See 27% Surge in Assets on Weather Risks: Commodities
  • Nickel Advances as Ukraine Fuels Concern Supply Might Run Short
  • Corn to Soybeans Slip as U.S. Weather Outlook Favors Planting
  • Gold Near Three-Week High as Ukraine Weighed With U.S. Economy
  • Sugar Rises Amid El Nino Alert Update; Arabica Coffee Also Gains
  • Nickel to Rally 20% Further Amid Indonesia Ban, Survey Shows
  • G-7 ‘Determined’ to Cut Russian Energy Dependence, U.K. Says
  • British Coins Pass Test in 800-Year-Old Rite as Osborne Watches
  • Cushing Oil Storage Area May Empty in Weeks: Morgan Stanley
  • Oseberg Crude Exports Said to Jump to Seven Cargoes in June
  • Copper Supply Additions May Peak in 2014, Plunge 79% by 2020
  • No Petroleum No Problem for Pipelines Backed by Private Equity

























The Hedgeye Macro Team














Did the 10-Year U.S. Treasury Go Over the Waterfall?

Takeaway: Everything that matters in macro happens on the margin.

Editor's note: This research excerpt from CEO Keith McCullough was originally written before this morning's market open. For more information on how you can subscribe to Hedgeye please click here.


Did the 10-Year U.S. Treasury Go Over the Waterfall?  - niag1


So, did the 10-year US Treasury Yield just go over the waterfall of interconnected risk?


After one of the more epic 2 hour moves I’ve ever seen for the 10-year yield (between 8:30-10:30am on Friday), my long-term TAIL risk line of 2.60% broke (2.58% this morning).


Did the 10-Year U.S. Treasury Go Over the Waterfall?  - 05.05.14 10 year yield post nfp


Gold is breaking out again and European stocks don’t like it inasmuch as high multiple US Growth Stocks won’t.


After frustrating people who missed the rip higher to $1380 in early March, Gold has been consolidating and finally broke out above my immediate-term TRADE momentum line of $1292 on Friday.


There is 0% coincidence in that after the 10-year yield gave it direction. Gold loves falling bond yields.


Did the 10-Year U.S. Treasury Go Over the Waterfall?  - 05.05.14 UST vs. Gold

Cartoon of the Day: Monsters

Takeaway: Buy in May and pray or just go away?

Cartoon of the Day: Monsters - Sell in May 05.05.2014

Early Look

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TGT - New CEO Has To Take EPS Down -- A Lot

Takeaway: Anyone looking at near term implication of the mgmt chg is missing the big picture. New CEO has to take earnings down, before they can go up

Let’s be clear about what happened…Sheinhafel was fired.  Too many people are saying that he ‘stepped down’. Not to rub this in his face, as we respect anyone that stays with one employer for 35 years. But the reality is that Target is in a world of hurt right now. Ultimately, this mess is his fault, and a regime change is appropriate.  Importantly, anyone looking at this solely as a state of near-term affairs at TGT is missing the bigger picture. This emphasizes to us how critical it will be for a new CEO to right-size (take down) the earnings structure before it can build a company with respectable margins and return profile that is consistent with its Target banner.


Here are some of our thoughts.


  1. The company reports earnings in two weeks. This is about the time that the Board gets its preliminary Flash report on the state of financial affairs. No CEO was ever fired because ‘business is just too darn good’.
  2. Contrary to what the press is touting today, we don’t think he was fired because of the data breach – or even the ensuing weak store traffic.  If anything short-term related, it’s probably because he set such egregious expectations with both the Board and the investment community for positive comp AND improving gross margin.  
  3. But our rather strong view is that these are short-term events that most quality organizations could otherwise overcome. In this case, they exposed Target’s vast deficiencies throughout its business – arguably the worst e-commerce business in retail, it’s flawed p-fresh and Red Card initiatives, the lack of growth in its core US market, and the highly questionable strategy to look towards the Great White North as a means to find square footage growth.
  4. Some people might argue that a new ‘rock star’ CEO will come in, cut costs and take up margins. We mostly disagree. Yes, Target can afford the best of the best. But any great CEO worth their salt will come in, assess the challenges, and invest in the business such that it has the foundation to take the stock meaningfully higher over the period their options or RSUs vest. That means taking margins and earnings down before they can (hopefully) ultimately climb back up again.
  5. We’re not making any changes to our financial model today, but our strong inclination is to take down our EPS estimates – which are already 27% below consensus in the out-years of our model – a huge delta for a sleepy company like Target. We wouldn’t be surprised to see earnings fall below $3.00 while new management gets Target’s act in gear. This makes today’s 3% selloff all the more immaterial in the grand scheme of how much lower this stock can go.






Conclusion: We’re short Target. We think that the model that management is selling to the Street leaves no room for error. Everything has to go right, and nothing can go wrong. We’re in the twilight of a department store margin cycle, margins are at peak, our proprietary survey shows that visitation at Target stores is down materially, and worse yet, the share appears to be going to Wal-Mart. We could make a case that is one of the worst e-commerce businesses in retail, and it is certainly not making up for the shortfall in stores. Lastly, Canada expectations are extremely high, and our analysis of demographics around new Canadian stores leaves us with the view that management growth and profitability expectations are a pipe dream. In the end, we’re 27% below the consensus in year 3 of our model – which is a huge delta for this company. We get to downside to the high $40s ($13/14) if we’re right, but about $5/$6 upside if we’re wrong – that’s nearly 2.5 to 1. We’ll take that anyday on a sleepy mega cap retailer like Target.  


TGT - New CEO Has To Take EPS Down -- A Lot - tgt financials


Earlier this week, we published our 47-page deck on why we think Target is a short.  We can’t print all the slides here, but here are five that we think are among the most notable.


1. The Macro Setup is not pretty. We just finished the fifth year of a margin expansion cycle for department stores. When we look back historically, we don’t think that there’s ever been a ‘year 6’. And by a country mile, we’re trading at peak valuations on these margins. The core of the TGT call goes far beyond this, but this is an extremely uninspiring backdrop.


TGT - New CEO Has To Take EPS Down -- A Lot - tgt1


2. Visitation is down. We’re all tired of hearing about the Data Breach. But the reality is that the fallout is extremely notable. We just conducted our third Department Store consumer survey and we can gauge sequential changes in visitation intent on an absolute basis, and relative to other retailers. This shows how TGT went from 13 visits (TTM) in 3Q, to near 14 in 4Q (pre-Breach), to 11 today. That might not seem severe, but that’s 20% by our math.


TGT - New CEO Has To Take EPS Down -- A Lot - tgt2 


3. Share is going to Wal-Mart. Not exactly the retailer we’d want to lose share to if we were Target. When WMT takes share, it has a tendency to not give it back. We have a lot of research in our deck that shows how consumers rank them on price, discounts, and product quality. The trends are compelling.


TGT - New CEO Has To Take EPS Down -- A Lot - tgt3


4. Dot.Com can’t save TGT. When other retailers get into trouble with their stores, often e-commerce makes up the difference. Our analysis of’s traffic trends suggest that is performing just as poorly as the stores – if not worse. Based on our research, we can make a case that Target has one of the worst e-commerce businesses in all of retail.


TGT - New CEO Has To Take EPS Down -- A Lot - tgt4


5. Canada can’t save Target, either. We pulled up the lats and longs for both Canada and US stores, and then analyzed demographics in a 20-minute driving radius. Canada lacks the density and income characteristics around its stores that Target enjoys in the US. That’s not to mention that there is a cannibalization issue given that 11% of target customers already shop in Target US stores. Consensus revenue estimates assume that Target Canada outstrips share of wallet levels Target has in the US. The company’s guidance assumes productivity levels above US levels. We think both are extremely unrealistic.


TGT - New CEO Has To Take EPS Down -- A Lot - chart5








If we had five minutes or less with TGT’s CEO, here’s what we’d ask.


Here’s the deal…you have five minutes alone with the CEO of a company, leaving time for maybe three questions. If you value your time you’re likely to focus on the key critical uncertainties that exist in the market. And make no mistake, they exist for every company out there.


We’re going to explore these key questions one company at a time, and we’re going to start with Target – which we think is one of the better shorts in retail.


Here’s what we’d ask CEO Gregg Steinhafel if we had five minutes or less.


1. Who Are You Guiding? Who are you talking to with your guidance, Wall Street or Main Street? We’ve never had to ask this question before to a CEO. But the reality is that you’re saying that you are going to comp positive this year, AND Gross Margins will be up (in the US and in Canada). And all of this will happen while you are lowering prices to win back customers who left after the data breach. It seems like an impossible combination. That leads us back to the question – are you giving that guidance to Wall Street or Consumers? This is kind of like what Cruise Companies do during their peak booking season – they generally have positive comments because they’re talking to travel agents, not to Wall Street. If they say that bookings are weak, then agents will discount price more heavily. Similarly, is Target sending out this perplexing message to keep consumer opinion high, even if it means the potential to lower expectations with Wall Street later in the year.


2. Share Loss. Who do you think is gaining the most business from the customers who left? For argument’s sake, let’s assume that it’s Wal-Mart. Do you think that WMT is prepared to let that business go so easily? Will you match Wal-Mart if it comes down to price? In reality, the people that left did not leave because of price. They left because of trust. You might be able to buy back trust, but you’ll have to undercut Wal-Mart on price rather significantly. If that’s true, refer to question #1.


3. What does Target want to be? That sounds like a ridiculous question at face value. But the reality is that it used to be Wal-Mart vs Target – in share of market, share of mind and share of investment dollars. But as bad as Wal-Mart’s rap sometimes can be, it has over 10,000 stores under 71 banners in 27 countries. It has several formats – from Supercenters, to warehouse clubs, to neighborhood markets, and it is even beta-testing C-stores/gas stations. At least it’s trying to evolve. Target has just has one primary format in North America, with a token operation in India. The point is that Target used to be right there with WMT – but now it seems to be somewhere between WMT and Kohl’s. When you look out five to 10 years, what will Target look like?


Bonus Question (if he hung around an extra 2 minutes).

Do you think you fired your customer? JC Penney fired its customer. Ron Johnson said at the time that he did not. Lululemon fired its customer. Chip Wilson said at the time that he did not. Both of those retailers will likely take 2-3 years to get an acceptable portion of customers back. Do you think that you have fired your customer? Your guidance suggests that the answer is No. (Note: we’d give him all the credit in the world if he said Yes – because it would suggest he’s doing something about it).

Fund Flows, Refreshed [Equity + Fixed Income]

Takeaway: This past week saw a rebound in both equity and fixed income flows, albeit to just running year-to-date averages.

This note was originally published May 01, 2014 at 09:42 in Financials by Hedgeye's Financials team.


Investment Company Institute Mutual Fund Data and ETF Money Flow:


Fund Flows, Refreshed [Equity + Fixed Income] - eye


In the most recent 5 day period, absolute money flow into both equity and fixed income mutual funds rebounded week-to-week to near the year-to-date averages, reversing last week's negative trends:


Total equity mutual fund flow accelerated sequentially week-to-week, producing a tally only slightly below the 2014 year-to-date weekly average. The $3.5 billion that came into all equity mutual funds during the most recent 5 day period ending April 23rd was split between a $1.4 billion inflow into U.S. equity funds and an improved $2.1 billion inflow into international stock funds. This higher demand for foreign equity products has been consistent over the past two years with international stock fund inflow having averaged $2.9 billion per week this year and $2.6 billion per week last year in 2013 with domestic fund products averaging an inflow of just $1.3 billion thus far in '14 and a $451 million inflow last year in comparison. The 2014 running weekly average inflow for all equity mutual funds is now $4.1 billion, an improvement from the $3.0 billion weekly average inflow from 2013. 


Fixed income mutual fund flow also accelerated substantially on a w/w basis, reversing last week's trend lines in the product graphs below, which had displayed decreasing momentum for bond funds versus equity funds. For the week ending April 23rd, $2.3 billion flowed into all fixed income funds, as opposed to last week's paltry $659 million inflow. The improvement in bond fund inflow this week is the result of $1.7 billion that flowed into taxable products and $531 million that flowed into tax-free or municipal products. The inflow into taxable products this week was the 11th consecutive week of positive flow and the inflow into municipal or tax-free products was the 15th consecutive week of positive subscriptions. The 2014 weekly average for fixed income mutual funds now stands at a $1.9 billion weekly inflow, a vast improvement from 2013's weekly average outflow of $1.5 billion, but still a far cry from the $5.8 billion weekly average inflow from 2012 (our view of the blow off top in bond fund inflow).


ETFs experienced dramatically positive w/w changes in trends, with a notable week subscription for Bond ETFs, which experienced an inflow of $1.2 billion, in contrast to the previous week's $204 million inflow. Stock ETFs left last week's $2.2 billion outflow far behind, netting $193 million in new inflows last week. The 2014 weekly averages are now a $973 million weekly inflow for equity ETFs and a $931 million weekly inflow for fixed income ETFs. 


The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $276 million spread for the week ($3.7 billion of total equity inflow versus the $3.4 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $5.4 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week). 


Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.   



Fund Flows, Refreshed [Equity + Fixed Income] - fundf



Most Recent 12 Week Flow in Millions by Mutual Fund Product:



Fund Flows, Refreshed [Equity + Fixed Income] - 2


Fund Flows, Refreshed [Equity + Fixed Income] - 3


Fund Flows, Refreshed [Equity + Fixed Income] - 4


Fund Flows, Refreshed [Equity + Fixed Income] - 5


Fund Flows, Refreshed [Equity + Fixed Income] - 6



Most Recent 12 Week Flow Within Equity and Fixed Income Exchange Traded Funds:



Fund Flows, Refreshed [Equity + Fixed Income] - 7


Fund Flows, Refreshed [Equity + Fixed Income] - 8



Net Results:



The net of total equity mutual fund and ETF trends against total bond mutual fund and ETF flows totaled a positive $276 million spread for the week ($3.7 billion of total equity inflow versus the $3.4 billion inflow within fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52 week moving average has been $5.4 billion (more positive money flow to equities), with a 52 week high of $31.0 billion (more positive money flow to equities) and a 52 week low of -$37.5 billion (negative numbers imply more positive money flow to bonds for the week).



Fund Flows, Refreshed [Equity + Fixed Income] - 9 




Jonathan Casteleyn, CFA, CMT 



Joshua Steiner, CFA



European Banking Monitor: Credit Spreads Tighten Across Europe

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 .




European Financial CDS - All European swaps, with the exception of the Greek banks and three Swedish banks, tightened over the past week. Most of the 31 swaps that tightened did so by a notable amount. On average, French swaps tightened by 7 bps, German by 8 bps, Italian  by 9 bps, Portuguese by 14 bps, Scottish by 16 bps, Spanish by 9 bps, and UK by 6 bps. In contrast to the past couple of weeks, Greek banks widened considerably w/w, by an average of 48 bps. The widening of Swedish banks was nominal, with three banks widening by 1 bps each, and the fourth tightening by 1 bps. 


European Banking Monitor: Credit Spreads Tighten Across Europe - chart 1 financials cds


Sovereign CDS – Sovereign swaps mostly tightened over last week. Italian sovereign swaps tightened by -3.9% (-4 bps to 111 ) and American sovereign swaps widened by 0.7%.


European Banking Monitor: Credit Spreads Tighten Across Europe - chart 2 sovereign cds


European Banking Monitor: Credit Spreads Tighten Across Europe - chart 3 sovereign cds


European Banking Monitor: Credit Spreads Tighten Across Europe - chart 4 sovereign cds


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 16 bps.


European Banking Monitor: Credit Spreads Tighten Across Europe - chart 5 euribor ois spread


Matthew Hedrick



Ben Ryan


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%