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Retail Callouts (5/22): WSM, Adi, NKE, UA, SKX

Takeaway: WSM more strength in DTC. Adi-soccer balls and t's to fuel WC growth. SKX ends Hall of Fame endorse run.




  • ARO - Earnings Call, 4:15pm
  • ROST - Earnings Call, 4:15pm
  • GPS - Earnings Call, 5:00pm


FRIDAY (5/23)

  • FL - Earnings Call, 9:00am




WSM - 1Q14 Earnings


Takeaway: Hard to ignore a 10% comp. The key takeaway from the print, in our opinion, is the strength of WSM's DTC channel. For the first time in the company's history, DTC accounted for over 50% of net revenues and more importantly 80% of EBIT.


We go back and forth on how to handle WSM. We continue to believe that RH will continue to consolidate market share as it reinvents its real estate portfolio and introduces new product offerings to both its category lineup and bigger boxes. The truth is that neither name commands a significant share in the highly fragmented home furnishings market. Still a lot of white space for both to expand before we get concerned about competition.


Retail Callouts (5/22): WSM, Adi, NKE, UA, SKX - chart1 5 22


ADDYY - Adidas sees boost to sales from World Cup



  • "German sportswear company Adidas has given a more precise sales growth target for 2014, amounting to a rise of up to 8 percent, as it gets a lift from the soccer World Cup that starts in Brazil next month."
  • "'This year we will add 1-1.2 billion euros ($1.4-1.6 billion) to operational revenue, with the World Cup playing an important role,' Chief Executive Herbert Hainer told journalists at a briefing in Munich in remarks released for publication on Thursday."
  • "That increase represents a rise of 7-8 percent from the 14.492 billion euros of sales Adidas recorded in 2013. Previously, Adidas had guided for a 'high single-digit' increase in currency-neutral sales in 2014."
  • "'Football is the DNA of our company. We want to clearly show that we are number one in football,' Hainer said, adding Adidas expected to sell significantly more balls than at the last World Cup in South Africa four years ago and about as many shirts."
  • "Hainer acknowledged, however, that Adidas faced a 'head-to-head' race with Nike in the business for football boots, including in Germany, predicting Adidas would sell 2 million pairs of special boots designed for the World Cup."
  • "Adidas is investing a 'double-digit million sum' in advertising associated with the World Cup with a particular focus on social media, he said, with plans for a media room in Brazil to deliver and filter content from its sponsored teams and players."


Takeaway: Pretty damning admission by Hainer. Adi is 'head-to-head' with NKE in the football boots arms race? We would have guessed as much, but NKE is just starting to gain traction in the soccer market. Add UA to the mix and it’s a pretty bleak outlook for Adi. When soccer balls and t-shirts are the key pillar of growth for a footwear company - we get concerned.


SKX - Skechers’ Home Run



  • "Skechers’ Relaxed Fit men’s line is adding former baseball player Pete Rose to its family. Rose will appear in ads this fall for the footwear line. He joins other sports figures including Joe Montana, Mark Cuban and Joe Namath, who have all appeared in the Relaxed Fit marketing."


Takeaway: This officially ends SKX's string of Hall of Fame ex. Athlete endorses.




WMT - Report: Wal-Mart to expand Sunnyvale e-commerce operation



  • "Wal-Mart is reportedly planning to substantially expand its e-commerce operation based in Sunnyvale, California. According to the Oakland Tribune, Wal-Mart intends to add hundreds of staffers to its global e-commerce unit there, bringing the total number of e-commerce employees to about 1,000."
  • "In addition, Wal-Mart will lease a 107,000-sq.-ft. space in Sunnyvale to help house its e-commerce operations. Currently, the retailer employs about 550 e-commerce employees in Sunnyvale at an existing facility it will maintain."


JCP - J. C. Penney Company, Inc. Grants Previously Disclosed Equity Inducement Award to Edward Record



  • "...J. C. Penney Company, Inc. announced that on May 20, 2014, an equity inducement award of 223,964 restricted stock units (RSUs) was granted to Edward Record, the Company's Executive Vice President and Chief Financial Officer, in connection with the commencement of his employment."
  • "The RSUs will vest in thirds on the first, second and third anniversaries, respectively, of the grant date, provided Mr. Record remains continuously employed with the Company through those dates.  The award fully vests if Mr. Record is terminated for any reason other than cause, and if his employment terminates in certain cases within two years following a change of control at the Company."


BrandZ's Most Valuable Global Brands Unveiled



  • "...global research agency Millward Brown...unveiled its 2014 BrandZ Top 100 Most Valuable Global Brands Wednesday."
  • "The ninth release of the study measures consumer brand perception along with financial data to calculate brand value."
  • "Among this year’s top 10 apparel brands, Nike was named the most valuable, stealing the top spot from Zara by increasing 55 percent to a brand value of $24.6 billion. The strongest rise, however, came from Uniqlo, which rose by 58 percent to $7.3 billion, moving up two notches to take the number-four spot. The only decliner in the top 10 was U.S. yoga brand Lululemon, down 13 percent to ninth place and a valuation of $3.3 billion."


Retail Callouts (5/22): WSM, Adi, NKE, UA, SKX - chart2 5 22


Alec Richards


VIDEO | Keith's Macro Notebook 5/22: VIX VOLUME EUROPE

A Liquidity Trap

Client Talking Points


The front-month frustration smashed right back to its year-to-date lows (not a buy signal). Last time VIX touched this level was August 2013 – the SPX dropped -3.5% in less than 2 weeks from there.


The giant sucking sound of a liquidity trap continues to manifest. Total US equity market volume was down -9% and -31% versus one- and three-month averages yesterday. TREND continues of volume DOWN on up-days and UP on down-days.


Equities continue to signal lower-highs as the PMI data slowed sequentially – rate of change model matters. Italian stocks (led gainers January-April) now lead losers on down days, down -0.9% this morning for MIB Index, breaking our TREND line.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Hologic is emerging from an extremely tough period which has left investors wary of further missteps. In our view, Hologic and its new management are set to show solid growth over the next several years. We have built two survey tools to track and forecast the two critical elements that will drive this acceleration.  The first survey tool measures 3-D Mammography placements every month.  Recently we have detected acceleration in month over month placements.  When Hologic finally receives a reimbursement code from Medicare, placements will accelerate further, perhaps even sooner.  With our survey, we'll see it real time. In addition to our mammography survey. We've been running a monthly survey of OB/GYNs asking them questions to help us forecast the rest of Hologic's businesses, some of which have been faced with significant headwinds. Based on our survey, we think those headwinds are fading. If the Affordable Care Act actually manages to reduce the number of uninsured, Hologic is one of the best positioned companies.


Construction activity remains cyclically depressed, but has likely begun the long process of recovery.  A large multi-year rebound in construction should provide a tailwind to OC shares that the market appears to be underestimating.  Both residential and nonresidential construction in the U.S. would need to roughly double to reach post-war demographic norms.  As credit returns to the market and government funded construction begins to rebound, construction markets should make steady gains in coming years, quarterly weather aside, supporting OC’s revenue and capacity utilization.


Legg Mason reported its month ending asset-under-management for April at the beginning of the week with a very positive result in its fixed income segment. The firm cited “significant” bond inflows for the month which we calculated to be over $2.3 billion. To contextualize this inflow amount we note that the entire U.S. mutual fund industry had total bond fund inflows of just $8.4 billion in April according to the Investment Company Institute, which provides an indication of the strong win rate for Legg alone last month. We also point out on a forward looking basis that the emerging trends in the mutual fund marketplace are starting to favor fixed income which should translate into accelerating positive trends at leading bond fund managers. Fixed income inflow is outpacing equities thus far in the second quarter of 2014 for the first time in 9 months which reflects the emerging defensive nature of global markets which is a good environment for leading fixed income houses including Legg Mason.

Three for the Road


JAPAN: Nikkei +2.1% after being down 5 of the 6 sessions prior - still -11.3% YTD #hooray @KeithMcCullough


"Change your thoughts and you change your world." - Norman Vincent Peale


The Smithsonian's National Zoo is offering an up-close-and-personal visit with its 8-month-old giant panda Bao Bao. For $6,000, zoo-goers can take a behind-the-scenes tour to meet Bao Bao and her mother, Mei Xiang, as a part of the zoo's VIP package for their annual fundraiser.  (USA Today)

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So, Challenge Their God

This note was originally published at 8am on May 08, 2014 for Hedgeye subscribers.

“It was fortunate that the Commodore was not educated; for had he been, he would have been a god.”

-New York Sun, April, 1878


You know I love 19th century American Capitalist history. You know I love the epic story of Cornelius Vanderbilt too. The aforementioned quote comes from Part Three of The First Tycoon (pg 333). We should all thank our respective gods that Vanderbilt wasn’t an Ivy League economist.


Counter to popular Marxist beliefs in this country, the capitalists built the steamships and rails. They blew themselves up trying to make money plenty of other ways too – and they liked it. That’s the only way to learn and evolve – having a very real chance that you can fail.


Yesterday, Janet Yellen failed to convince me that she isn’t the ideologue that her partner in pulverizing America’s poor was. I don’t think she’s going to persuade anyone who doesn’t get paid by QE either. That’s at least 80% of the country, fyi.


Back to the Global Macro Grind

So, Challenge Their God - Titanic 03.31.2014 

No worries about the long-term in this country. When I am long dead, maybe my son, daughters, or theirs will have an opportunity to live an American life that doesn’t included an un-elected academic droning on like Charlie Brown’s teacher about how the Fed hasn’t perpetuated all-time highs in asset price inflation.


Cost of living in this country is bubbling up to all-time highs. And instead of talking about that yesterday, Yellen was more concerned about what we have been signaling now for months – a redo of a US #HousingSlowdown.


“So” (in classic groupthink lingo, she prefaced every Keynesian comment she made yesterday with that), instead of following the money, follow how her Policy To Inflate Housing Prices plays out from here:

  1. She starts to talk down Housing’s recovery and, in doing so, rhetorically un-tapers…
  2. As she un-tapers the hybrid tightening (tapering), the currency and bond markets look more and more right…
  3. US Dollar Down, Rates Down = Moar Commodity #InflationAcceleraring, and Moar Real #ConsumerSlowing

That’s right. As the cost of living ramps, 80-90% of this country has less dollars to spend. Inflation is real-time, whereas your wages (if you are lucky) adjust on a 1yr lag… and things like rent inflate on a 12-18 month lag to home price appreciation (US Home Prices were +12-13% nationally last year).


“So”, if you are in the 30% (and climbing) of Americans who rent (that’s 1/3 of the cost of living for the median US Consumer – see our Q2 Macro Themes slide deck on the math), Yellen’s narrative on how 0% “is good for housing” is really good for you, right? Yeah, a really good kick in the teeth.


David Einhorn challenged Yellen’s god (Bernanke) on this at a dinner recently (see yesterday’s Bloomberg story: “Einhorn Finds Dinner Chat With Bernanke Frightening”), “so”, take his word for it if you can’t take mine.


Einhorn is obviously a lot smarter than I, but he and the Thunder Bay Bear have a few things in common:

  1. We were raised in the 1970s (Nixon/Carter bipartisan support to Burn The Buck – i.e. The Policy To Inflate)
  2. We both learned linear Keynesian economics at Ivy League schools (Cornell and Yale)
  3. We both learned, as young hedge fund managers in 2000-2001, what Fed bubbles that pop look like when they are popping

“So”, call our paths experience… or something like that. But don’t call us the guys who were buying-the-damn-bubble-stocks on January 1st, 2014. By the way, Twitter (TWTR) is up +3% this morning. “So”, if you bought it JAN 1, you’re down 50%, and only need to be up another +98% from here to breakeven.


In hedgie land (the difference between a hedgie like Einhorn and a Hedgeye is that he runs money and I run my mouth), we call blowing up in names like Zooolilly (ZU) or Fireye (FEYE) or YELP! “drawdown risk.” For the high-multiple momentum bulls, that risk is #on.


“So”, the real reason why Yellen wouldn’t call anything a bubble yesterday – or why Bernanke didn’t call the all-time highs in Housing (2006-2007), Oil (2008), Gold (2011), Food (2012), Bonds (2012), or Junk (2014 – I think Janet called that “high yield”) bubbles, is that they are bubbles.


So, Challenge Their God - Chart of the Day


The only way to prevent a bubble from popping is to: A) not call it one and B) rhetorically signal why you should buy moarrr of it. Or so the Fed thinks. “So”, I think you should take your time observing this gong show and challenge The Fed’s ideological god by shorting the bubbles that start to pop, with impunity.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.56-2.65%

SPX 1861-1890

RUT 1101-1121

VIX 12.83-14.52

USD 79.01-79.59

EUR/USD 1.38-1.39

Pound 1.68-1.70


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer

May 22, 2014

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Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.