TODAY’S S&P 500 SET-UP – June 13, 2014

As we look at today's setup for the S&P 500, the range is 38 points or 0.89% downside to 1913 and 1.08% upside to 1951.                                               













  • YIELD CURVE: 2.15 from 2.16
  • VIX closed at 12.56 1 day percent change of 8.28%


MACRO DATA POINTS (Bloomberg Estimates):         

  • 8:30am: PPI Final Demand, May, est. 0.1% (prior 0.6%)
  • 9:55am: UMich Confidence, June, est. 83 (prior 81.9)
  • 1pm: Baker Hughes rig count



    • House, Senate schedules TBA; No votes in either chamber
    • President Obama to visit Sioux tribe in North Dakota
    • 8:30am: U.S.-EU financial services discussion at Peterson Institute for International Economics
    • 9:30am: British Ambassador to U.S. Peter Westmacott speaks to Bloomberg reporters, editors at Bloomberg Government breakfast
    • U.S. ELECTION WRAP: Cantor Aftermath; Jockeying on Coal
    • Clinton’s popularity drops to 52% in poll as 2016 edge shrinks     



  • Intel revenue gets boost as businesses upgrade office computers
  • Express soars after Sycamore Partners says it plans to make bid
  • Obama won’t rule out airstrikes as Iraq battles militant group
  • Oil rises as extremist advance in Iraq threatens crude supply
  • Amaya to acquire Rational, owner of PokerStars, for $4.9b
  • Musk makes Tesla patents “open source” to boost battery cars
  • Tesla teams up w/Soho to add car-charging outlets in Beijing
  • BOJ sticks with easing as analysts delay extra action calls
  • Abe plans company tax cut in 2015 as Kuroda warns on budget
  • China’s May output growth signals economy is stabilizing
  • LinkedIn ordered to face claims it misused user e-mail contacts
  • Malone taking F-1 stake said to hang on $1b value gap
  • Bitcoins seized from Silk Road to be sold at auction in June
  • Cimarex Energy to replace Intl Game Technology in S&P 500
  • Apollo Global in talks to buy Encana’s Bighorn properties: WSJ
  • Relativity Media seeking close of $1b placement: N.Y. Post
  • Fed Decision, CFTC, Amazon, Oracle: Week Ahead June 14-21



    • No earnings scheduled by S&P 500 cos.



  • Oil Heads for Year’s Biggest Weekly Gain as Iraq Unrest Worsens
  • Iraq Insurgency Risks Biggest Source of New OPEC Oil, IEA Says
  • Commodities Advance to Nine-Month High as Oil Rallies on Iraq
  • Gold Poised for First Back-to-Back Weekly Increase Since April
  • Copper Advances on Indications Lower Prices Attracted Buyers
  • Naimi’s Good Times Will Last as Lost Output Lifts Prices: Energy
  • Wheat Trims Fifth Weekly Loss as Bear Market May Spur Demand
  • LBMA Gets 10 Proposals to Develop Alternative to Silver Fixing
  • Platinum Producers See Miners’ Return Next Week If Deal Accepted
  • Ukraine Ready to Pay Debt if Russia Agrees to $326 Gas: Naftogaz
  • Cocoa Farmers at Odds With Industry on Benefits of Certification
  • GrainCorp Says Shipped Grain to Brisbane From Southern Australia
  • Natural Gas Bull & Bear Pits Demand vs. Robust Supply: Outlook
  • Sunny Weather Boosts U.K. Wheat Crop Potential Before Harvest


























The Hedgeye Macro Team














LULU = Activist Candy

Takeaway: Things are getting so bad that it’s good. If no one goes activist, we might. Shareholders deserve it. Still solid acquisition candidate.

Conclusion: We think that things are getting so bad, that it’s almost good. This company is in worse shape than the quarter suggests. The good news is that every problem we see can be fixed with the right talent steering the ship. The bad news is that such talent is nowhere to be found in Vancouver. The reality is that someone will have to step up and go all activist on LULU. Valuation is at a point where we could see that happening, which could be facilitated by recent tension at the Board level.  And if it doesn’t happen, we might just lead the charge ourselves. Value needs to be unlocked. This is an amazing brand with solid global growth prospects. Management is too focused on recapturing Gross Margin that is a) lost forever, and b) something that investors won’t pay for without meaningful top line growth. If all else fails, there are no fewer than five public companies eyeing LULU, not to mention financial buyers.  



We said that the risk/reward for LULU would really shape up on a miss. We’re standing behind that statement. If we had to be long or short at this point, we’d be long. Fortunately, we don’t have to be either. But let’s make one thing abundantly clear. Our view that it is a more favorable risk/reward is not because we have confidence in management executing a sound growth strategy. Quite the opposite, actually. This is as close to a ‘no confidence’ vote as we’ve come across with a management team in a long time. If this was a weak brand with questionable growth prospects, then it’d be game over. But the fact is, this is what we’d consider one of only a small handful of truly defendable brands in retail. When there’s a great brand with bad management, it is a situation that can be easily fixed. When even the greatest of managers are in charge of marginal brands, they’re usually terminal. This is definitely the former.


If the play here is for a rebound in the business under the current regime, then it is an absolute coin toss as to whether they succeed. We don’t like flipping coins. Process = Good. Coin Flip = Bad.


That means we need major change inside the company.  John Currie (CFO) getting pushed out is a start. He was terrific for LULU in its early years (when Chip was still relevant), and sales were sub $500mm. But so many of us forget just how fast LULU grew, as sales were a mere $275mm in 2007. The skill sets throughout this company today are broadly consistent with those of an entrepreneurial early-cycle company. The problem is that LULU is going through puberty. It is sitting at $1.6bn in sales, and is in need of a completely different range of skills. Unfortunately, we’re not convinced that CEO Laurent Potdevin has them either.


WINNING VS LOSING: (LULU should look 948 miles South to see how it’s done)

We think it’s so ironic that LULU reported earnings within 14 hours of Restoration Hardware (RH – our top long idea). Some similarities are striking. Both are $1.6bn in revenue, both serve a very high end consumer in a fragmented and hyper-growth piece of the retail space, and both can conceivably achieve $4-$5bn in revenue over a 5-year time period. The big difference is that the CEO of RH (who many people hate) got on the call, played offense, took control and set the investment narrative. He conveyed top to bottom what his vision is for the company, what it will mean for long-term revenue growth, what the margin implications are, and what kind of capital is needed to achieve those goals and maximize ROI. Laurent said…well…not that.


LULU, instead, was extraordinarily defensive. Granted, weak trends will put anyone on defense. But we did not listen to the call and think “hey, these guys really understand their business.” There was no talk about long term growth targets, no crisp delineation of key growth initiatives, with the only real numbers given around share repurchase and gross margin goals.


Let’s address the gross margin issue for a minute. The fact that this company leads in with recovery of gross margins to a mid-50s level is preposterous. If the company can recapture a few points in margin over time, then great. But there’s no way we (or most others) will pay up for that now. This is a mid-cycle growth company that is growing outside of an extremely profitable core (dresses, denim, men’s – fine, but not Gross Margin Accretive). There is one thing and one thing only that most investors will pay for with LULU – top line growth.  Yet the only top line growth drivers they really address on the calls are little near-term tactical patches that are irrelevant in the context of investing in Retailers.  



What this means for us, is that the problem is still…you guessed it…Chip (Wilson, Founder). As much as everyone likes to say that Chip stepped away last year, the fact is that the guy still controls 27% of the voting stock. Voting stock aside, his influence inside the hallways of Lululemon trumps that of the CEO that he hand-picked and pushed through the Board approval process. John Currie was Chip’s CFO, and when the Board decided to push him out over the past week, we think that’s what prompted Wilson to vote against the re-election of the two Board members who caused it (one of whom replaced Chip as Chairman).


What’s nice about this is that the Board is no longer uniformly ‘Chipped’.  The more the Boardmembers band together and show Chip that he’s no longer the boss, the better chance this company has of succeeding.


The reality with all of this is that someone will have to step up and go all activist on LULU. Valuation is at a point where we could see that happening. And if it doesn’t happen, we might just lead the charge ourselves. Value needs to be unlocked.



One consideration is whether the company’s troubles put it in play. The answer there, we think , is Yes.

  1. Nike is a perennial possibility. Though its strategy is to build instead of buy (and it passed when LULU was at $8) the fact is that it has been chasing LULU for years, and LULU still is far more authentic for Yoga than Nike is. Low probability. But something to consider.
  2. Kering is in print saying that it wants to broaden its portfolio of sports brands (the owner of Gucci also owns Puma, Tretorn and Volcom). Does not hurt that it is a French company and LULU has a French speaking CEO.
  3. VFC is possible. But VFC is rumored to be buying everything. It has Lucy, which is a poor-man’s version of LULU. It’d be interested at the right price.
  4. PVH is an interesting thought. It’s business is in trouble, and what does PVH do when its core weakens? It does a HUGE acquisition. Enter LULU.
  5. Here’s a dark horse…but GPS is not completely out of the realm of possibility. Granted, it’s eating LULU’s lunch with Athleta in markets where the brands overlap. But GPS could handle it financially, and it would give the company some organic growth.

LULU = Activist Candy - LULU financials


Poll of the Day Recap: 56% Forecast a 10% Decline in the S&P 500

Takeaway: 56% voted for a 10% decline; 44% voted for a 10% rise.

Although the S&P 500 is down on the day it is still hovering near its all-time highs on essentially no volume, we want to know what you think is next for the S&P 500.


Today’s poll asked: What's next for the S&P 500; up 10% or down 10%?


Poll of the Day Recap: 56% Forecast a 10% Decline in the S&P 500  - bearvsbull


At the time of this post, 56% voted for a 10% decline; 44% voted for a 10% rise.


Those who forecast a 10% decline wrote:

  • From here, S&P 500 gain of 10% is about +195.  A gain of that magnitude seems quite unlikely with inflation accelerating, growth slowing, low volume...  However, the caveat is what will the Fed do?  Will the asset purchases taper cease soon?  Will the Fed begin increasing asset purchases again soon after ending the taper?  With greater currency devaluation, it wouldn't be too surprising to see the S&P 500 rise 10% in that monetary scenario.
  • It'll inch up, but not reach the 10% gain before it starts declining; there are too many weak economic factors to consider, and the investors who make the markets move will wise up soon enough..


Voters who predict a 10% rise wrote:

  • Despite what seem to be very real and logical macro conditions (for a bear case), emotions and optimism are driving the market for now (and that can't be ignored), so I'd place my bet on 10% up (first), before it eventually goes down.
  • Well at least another 5%  ; if you take the SP/500 range 1993 low to the 2008 high--a 161% Fib extension calls for   from the 1993 low to the 2008 high has 2042 since the 127% 1668 was breached....


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Real Conversations: James Grant of Grant's Interest Rate Observer

James Grant, editor of Grant's Interest Rate Observer, discusses his latest thoughts on the economy, monetary policy, market froth, gold & where hidden investing opportunities may lie with Hedgeye CEO Keith McCullough in this edition of "Real Conversations."

Cartoon of the Day: On Your Mark

"Healthcare spending was critical in supporting 1Q GDP. With the census bureau’s release of the 1Q14 QSS survey yesterday, that estimate of healthcare spending saw a sharp negative reversal," wrote Daryl Jones in today's Morning Newsletter.


"The net-net of this is that the final estimate of 1Q GDP (June 25th) will be (even more) dismal and GDP is likely to miss the ever bullish consensus expectations for full year 2014."


Cartoon of the Day: On Your Mark - On your mark GDP 6.12.2014

@Hedgeye Daily Trading Ranges, Refreshed

Note: The following proprietary buy and sell levels on major markets, commodities and currencies were originally published June 12, 2014 at 08:25. Click here to learn more about Hedgeye CEO Keith McCullough's trading ranges and how you can subscribe.

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