Fortunes Fall Short

This note was originally published at 8am on July 23, 2014 for Hedgeye subscribers.

“To go too far is as bad as to fall short.”

-Callie’s fortune cookie


Last night was a beauty at the McCullough dinner table. My newbie was chirping up a storm with pablum all over her face and my two older kids had a few of the best back-to-back fortune cookies ever.


Jack’s fortune reminded me of a critical risk management lesson: “there is nothing permanent, except change.” So I told him that that’s what my man Bill Ackman was probably thinking at his dinner table last night too.


Picking on the slide-deck guru is just fun and games. So please don’t take offense to my entertaining you with this topic this morning. It’s trending more than Putin/Obama. Fully loaded with the +25% short squeeze in HLF yesterday, I think the guy actually cried (sort of).


Fortunes Fall Short - 90


Back to the Global Macro Grind


There’s no crying in the asset management business. If you are going to well-up in public, I don’t care how much you are “worth” - I am going to give you a time-spanking and an Early Look time-out.


In other US stock market news yesterday…


  1. The Russell 2000 bounced on no-volume to lower-bubble-highs yesterday (1175 TREND resistance)
  2. Total US Equity Market Volume was -16% and -29% vs. its 1 and 3 month averages, respectively
  3. Front-month stock market fear (VIX) sold off to a higher low of 12.24, holding 11.94 TREND support


In other words, “rallies” continue to ramp to lower-highs on lower and lower volumes (not good) as volatility continues to make a series of higher-lows from the VIX’s most asymmetric point (10). All the while, the long bond rallied intraday yesterday and the 10yr yield is hitting fresh Q314 lows of 2.46% this morning.


With the Russell (IWM) still down YTD (not a good return), we’re going to keep you focused on where the real bull markets are in 2014:


  1. Treasuries
  2. Commodities
  3. Emerging Markets


The Treasuries one is easy to understand, provided that you understand that they (the Old Wall) still do not understand the link between inflation and both real wages and consumption growth.


As you can see in our Chart of The Day today, even the US government’s contortionist reading on US Consumer Price Inflation (CPI) delivers you a fresh new YTD low in NEGATIVE real wages (not good).


Now, to be fair, someone who A) hasn’t been long of inflation in 2014 and/or B) believes anything the Fed tells them about inflation will tell you that (if you back out shelter – i.e. rent, which is hitting all-time highs, and represents 30% of cost of living for the average American consumer) “2% inflation feels about right.” #Goldilocks


There were a bunch of 16th century dudes hanging out in officialdom who told Copernicus that Earth was the center of the universe too. But that doesn’t change that nothing is permanent, except change. As time and price changes, real-time risk managers do.


It wasn’t just Chipotle (CMG) taking price above the “goldilocks 2%” inflation rate yesterday:


  1. Hog prices ripped another +2% to +49.3% YTD
  2. Cattle prices popped another +2% to +15.9% YTD
  3. Aluminum prices continued another +1.9% higher to +14.5% YTD


But, those poor CNBC producers naval gazing at Billy probably missed that. Must resuscitate ratings from hitting new lows! I have slide decks too, but I certainly don’t have all the answers to the market universe; Mr. Macro Market does.


And I think that’s one of the main lessons of the last half decade – whether you are a central-planning goddess, hedge fund legend, or just plain wicked smaht… you can try to tell markets, prices, and economies what to do; but they don’t have to listen.


You can try to gussy up the idea as your “best ever.” You can tell all your “smart” friends what you are going to do before you try to do it too. But, eventually, you’re going to jump the shark, go too far, and fall short.


Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signal in brackets) are now as follows:


UST 10yr Yield 2.44-2.53% (bearish = bullish bonds)

SPX 1962-1985 (bullish)

RUT 1133-1164 (bearish)

Italy MIB Index 20157-21138 (bearish)

VIX 11.94-14.26 (bullish)

USD 80.29-80.93 (bearish)

EUR/USD  1.34-1.36 (neutral)

Pound 1.70-1.72 (bullish)

WTI Oil 100.15-104.03 (bullish)

Natural Gas 3.73-4.01 (bearish)

Gold 1299-1324 (bullish)

Copper 3.17-3.23 (bullish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Fortunes Fall Short - Chart of the Day

August 6, 2014

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TODAY’S S&P 500 SET-UP – August 5, 2014

As we look at today's setup for the S&P 500, the range is 25 points or 0.84% downside to 1904 and 0.46% upside to 1929.                                         













  • YIELD CURVE: 1.99 from 2.02
  • VIX closed at 16.87 1 day percent change of 11.57%


MACRO DATA POINTS (Bloomberg Estimates):

  • 7am: MBA Mortgage Applications, Aug. 1 (prior -2.2%)
  • 8:30am: Trade Balance, June, est. -$44.8b (prior -$44.4b)
  • 10:30am: DOE Energy Inventories



    • Final day of U.S.-Africa Summit:
    • 10am: Session on “Investing in Africa’s Future”
    • 12:30pm: Session on “Peace and Regional Stability”
    • 2:30pm: Session on “Governing for the Next Generation”
    • 5pm: President Obama holds news conference
    • Republican CFTC Commissioner Scott O’Malia to step down



  • Sprint said to end T-Mobile discussions, to name new CEO
  • Murdoch’s Fox withdraws $75b offer for Time Warner
  • Walgreen said not to exit U.S. in buying rest of Boots
  • Walgreen to provide update on Alliance Boots deal ~6am
  • Apple, Samsung strike deal to end patent suits outside U.S.
  • China said to leave Apple iPad, MacBook off purchasing list
  • Cerner to buy Siemens health data business for $1.3b
  • Standard Chartered sees further penalty on new compliance issues
  • StanChart profit falls; sees challenging 2H ahead
  • Disney profit tops ests. as feature films spark studio gains
  • Groupon forecast trails ests. as e-commerce transition drags
  • Putin blasts sanctions as Poland cites Ukraine invasion risk
  • German factory orders slump as geopolitical risks leave mark
  • U.K. industrial production increases less than forecast
  • Goldman, Deutsche Bank said near deal for Greek buyout firm
  • Bats said in SEC settlement talks over high-speed-trading perks
  • Capital One sent subpoenas in New York’s money-laundering probe
  • Italian economy contracted 0.2% q/q in 2Q; est. +0.1%



    • Alpha Natural Resources (ANR) 7am, $(0.74)
    • AOL (AOL) 7am, $0.45
    • Ariad Pharmaceuticals (ARIA) 7:35am, $(0.29)
    • Athabasca Oil (ATH CN) 6am, C$(0.05)
    • Avnet (AVT) 8am, $1.11
    • CenterPoint Energy (CNP) 8:15am, $0.24
    • Chesapeake Energy (CHK) 7:01am, $0.44 - Preview
    • Cognizant Technology (CTSH) 6am, $0.63 - Preview
    • Denbury Resources (DNR) 7:30am, $0.27
    • Devon Energy (DVN) 8am, $1.40 - Preview
    • Diebold (DBD) 8:37am, $0.39
    • Dish Network (DISH) 6:04am, $0.51 - Preview
    • HollyFrontier (HFC) 7am, $0.95
    • Molson Coors (TAP) 7:30am, $1.47
    • Mondelez (MDLZ) 8am, $0.39 - Preview
    • Nationstar Mortgage (NSM) 7am, $0.90
    • Nu Skin Enterprises (NUS) 7:30am, $1.27
    • Parker Hannifin (PH) 7:30am, $2.08
    • Ralph Lauren (RL) 8:01am, $1.76 - Preview
    • Rockwood (ROC) 6:28am, $0.50
    • Rowan (RDC) 8am, $0.22
    • Sinclair Broadcast (SBGI) 7:30am, $0.36
    • Spectra Energy (SE) 6:30am, $0.30
    • Synta Pharmaceuticals (SNTA) 7:01am, $(0.27)
    • Time Warner (TWX) 7am, $0.84 - Preview
    • Viacom (VIAB) 7am, $1.43 - Preview
    • Visteon (VC) 7am, $0.71
    • Voya Financial (VOYA) 6am, $0.70



    • 21st Century Fox (FOXA) 4pm, $0.39
    • Agrium (AGU CN) 4:13pm, $4.11 - Preview
    • Alliant Energy (LNT) 6pm, $0.60
    • American Capital (ACAS) 4:01pm, $0.18
    • American Water Works (AWK) 4:15pm, $0.64
    • Annaly Capital Mgmt (NLY) 4:05pm, $0.26
    • Antero Resources (AR) 4:05pm, $0.37
    • Atmel (ATML) 4:05pm, $0.09
    • Babcock & Wilcox (BWC) 4:42pm, $0.49
    • Brookdale Senior Living (BKD) 4:23pm, $0.06
    • Celldex Therapeutics (CLDX) Aft-Mkt, $(0.32)
    • CenturyLink (CTL) 4:05pm, $0.65
    • Concho Resources (CXO) 5pm, $0.97
    • Corrections of America (CXW) 4:15pm, $0.46
    • Dun & Bradstreet (DNB) 4:15pm, $1.35
    • Dynegy (DYN) 4:30pm, $(0.07)
    • EnerSys (ENS) 4:01pm, $1.05
    • Envision Healthcare (EVHC) 4:08pm, $0.25
    • Franco-Nevada (FNV CN) 4pm, $0.23
    • Gulfport Energy (GPOR) 4:05pm, $0.16
    • Integrys Energy (TEG) 5:17pm, $0.46
    • InterMune (ITMN) 4:01pm, $(0.56)
    • Jack in the Box (JACK) 4:02pm, $0.57
    • Keurig Green Mountain (GMCR) 4pm, $0.88
    • Matador Resources (MTDR) 4:01pm, $0.30
    • MBIA (MBI) 4:05pm, $(0.20)
    • Molycorp (MCP) 4:04pm, $(0.23)
    • Neurocrine Biosciences (NBIX) 4:01pm, $(0.18)
    • Novavax (NVAX) 4:05pm, $(0.07)
    • NPS Pharmaceuticals (NPSP) 4:30pm, $0.00
    • Plains All American (PAA) 4:08pm, $0.50
    • Prudential Financial (PRU) 4:07pm, $2.35
    • QEP Resources (QEP) 4:30pm, $0.33
    • Regency Centers (REG) 4:01pm, $0.16
    • Sanchez Energy (SN) 4:30pm, $0.24
    • SandRidge Energy (SD) 4:15pm, $0.04
    • Sun Life Financial (SLF CN) 5:10pm, C$0.72 - Preview
    • Symantec (SYMC) 4:01pm, $0.42
    • Theravance (THRX) 4:05pm, $(0.41)
    • Transocean (RIG) 4:15pm, $1.11
    • Veresen (VSN CN) 4:22pm, C$0.04
    • YY (YY) 4:01pm, $0.59
    • Zulily (ZU) 4:05pm, $0.04



  • BHP Vows to Prevent Port Hedland Strike as Union Cites Impasse
  • Goldman Sees Iron Ore Rout Extending as Supply Growth Quickens
  • Iron Giants Graze Cows on Land Size of Connecticut: Commodities
  • Marubeni Said to Invest in IPO of Meat And Dairy Supplier Japfa
  • China Soy Imports Seen by Top Buyer Exceeding USDA Estimate
  • Zinc Drops Amid Speculation Stronger Dollar Will Erode Demand
  • Canada Canola Crop Proves Resilient as RBC Sees Price Declines
  • U.K. Plans to Criminalize Energy-Market Rigging With New Laws
  • Malaysia Delays Full Implementation of B5 Biodiesel Mandate
  • Dirtiest Fuel Threatens 700-Year-Old Villages in Europe: Energy
  • Russia Sanctions Failing to Stanch Energy Deals With Japan
  • Rubber Drops on Demand Concerns as Thai Price at Five-Year Low
  • U.K.’s Rothamsted Trial Set to Harvest GM Oilseed in Weeks
  • Brent Oil Trades Near 9-Month Low on Slowing Economy; WTI Steady


























The Hedgeye Macro Team
















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NKE vs. UA – Endorsements Deep Dive

Takeaway: UA sponsorship portfolio is evolving rapidly. That’s not bad. But costs are accelerating more than many realize. Rev matters more than ever.

Conclusion: Here’s a detailed financial look at athlete endorsement trends between Nike and UnderArmour. These are long-term trends that don’t serve as a smoking gun for a given quarter. That said, it is fascinating to see how the portfolio of sponsorship deals is both growing and maturing at an accelerating rate. Furthermore, we can see the costs that are coming down the pike. For example, next year NKE is looking at an incremental $82mm (or $991mm in total) in endorsements. To justify that without being margin-dilutive, NKE needs to generate an extra $585mm in revenue. That’s 2.1% growth, which it can pretty much do in its sleep. UA, on the other hand, is looking at a 39% jump in minimum sponsorship payments to $81mm, its biggest jump ever. UA can cover that with a 9% incremental sales boost, or $210mm – not a problem for UA. But keep in mind that this past year it only needed $45mm to cover a measly $5mm incremental bump in endorsements. If there’s any real takeaway here it’s that as UA grows and succeeds in its own right, it is competing increasingly against the big boys (NKE, Adidas, Reebok, Puma) for marketable talent. It has a great advantage in that the brand is so hot, authentic and relevant. But those factors do not trump the economics associated with a higher ante-chip for sponsorship deals. We can see what’s coming on the cost side, now we just need the revenue to follow. It’ll probably come. But anyone looking for margins to go up might be in for a surprise. The revenue growth did not matter as much over the past year – but now it matters materially, especially with the stock trading at 70x+ earnings.



When people think of the biggest costs associated with competing in the athletic footwear and apparel business, they usually talk about raw materials, labor, distribution and physical infrastructure. All those things matter. But one of the biggest costs is athlete endorsements. This line item is so big, in fact, that the companies are required to file all minimum required payments in almost exactly the same way that retailers are obligated to outline future minimum lease payments under operating lease agreements.


We think that the comparisons are particularly interesting between NKE and UA. Obviously, there is a huge difference in aggregate sponsorship amounts, but in looking through the numbers we can pull away some interesting trends as to how each company’s portfolio is structured and evolving. Here are some key takeaways:


1. Gap is Huge, But Closing: Nike has $4.7bn in forward obligations to pay its athletes and teams, while UnderArmour is sitting at $273mm. That’s a huge difference, but keep in mind that UA was only 2% as large as Nike four years ago, and is 6% today. That far outpaced UA’s revenue growth.


NKE vs. UA – Endorsements Deep Dive - ua chart1


2. Both Follow The Same Trend.  We’d go to the mat with anyone who claims that UA and NKE don’t compete against one another for talent (yes, many people make this case to us). The reality is that when we chart sponsorship obligations over time as a percent of sales, the trends are unmistakable for these two companies. Nike operates on a higher (more expensive) plane than UA. But in each of the past seven years, they have moved in exactly the same direction. Nike’s not worried about this. UA probably should be at some level.


 NKE vs. UA – Endorsements Deep Dive - UA chart2


3. As a % of Demand Creation Spend, UA has become Nike. This chart is fascinating to us, as it shows how sponsorships went from 15% UA’s Demand Creation budget in its earlier years, and has more than doubled to a level that sits just higher than Nike.  This is neither good nor bad. It simply tells us that sponsorships and endorsements are a key part of the UA model.  Unfortunately, we’d point out that Nike has 4x more sponsorship obligations globally today ($4.7bn) than UnderArmour has generated in Operating Profit since the brand’s inception in 1996. UA is going to have to get more active with some bigger name athletes, and Nike won’t be too keen to lose that battle.   


NKE vs. UA – Endorsements Deep Dive - UA chart3


4. Obligation Weighting: UnderArmour generally has an endorsement portfolio with obligations that are more near-term weighted. Today, about 65% of its obligations are due by the end of 2016. Again, that’s neither good nor bad…it’s simply UA’s strategy.  Nike is more back-end loaded with almost a third of its deals due after 5-years. This is due to Nike’s long-term deals with the leagues like the NFL and national teams like Brazil. It’s in the process of exiting its 10-year deal with Manchester United, which saves it about $38mm annually.


NKE vs. UA – Endorsements Deep Dive - UA chart4


5. In looking at UA more closely, there’s actually been a fairly dramatic change in its sponsorship duration composition over the past two years alone. UA went from having 84% of deals due within 3-years and only 1% after 5-years, to having 19% due after year 5. This shows that UA is playing in the big leagues - competing for higher profile athletes and teams.


NKE vs. UA – Endorsements Deep Dive - UA chart5


Takeaway: Developing quant signals & fundamental data are supportive of investors adopting a defensive allocation w/ respect to the intermediate term.

In the following ~3-minute video, Senior Analyst Darius Dale walks through the key takeaways from our revised macro strategy, which we detail in a new 50-page slide deck jam-packed with thoughtful analysis and non-consensus conclusions.  


CLICK HERE to download the associated presentation.


CLICK HERE to view the aforementioned summary video. The investment conclusions are detailed below:




As always, please feel free to ping us with any follow-up questions.


All the best,




Darius Dale

Associate: Macro Team

BNNY: This Will Be Ugly

BNNY remains on the Hedgeye Best Ideas list as a Short.


Annie’s is reporting 1QF15 earnings on August 7th AMC.


Trading at 33x P/E (NTM), BNNY continues to be overvalued and is likely to contract further as we believe the company will disappoint on Thursday and guide lower for the remainder of the fiscal year.


Over the long run, the Annie’s brand and continued growth of organics should power above average sales growth, but earnings will remain elusive.  Importantly, BNNY will not generate any operating profit this quarter.  The competitive pressures in the organic space, specifically in the Mac ‘N’ Cheese segment, will not abate anytime soon.


Earnings estimates have moved slightly lower during the quarter, as the organic segment continues to see slower trends.  Depending on how well the company is able to manage SG&A, we believe earnings will come in around ($0.05) for the quarter.  This is $0.02 below consensus, but it wouldn’t surprise us if the company is able to manage expenses to limit the damage in the quarter.


Our model generates lower sales than the Street, as well as lower gross margins and SG&A margins.  We’re expecting sales growth of +3% in the Meals segment, which would imply a slowdown from recent trends in the category, reflecting the recent deceleration in consumption and the UNFI deloading.


BNNY: This Will Be Ugly - 1


Following the release, we expect the FY15 consensus EPS estimate of $0.90 to be revised lower by $0.10-0.20. 


The risk to staying short is an outright sale of the company, but we don’t see this happening any time soon!


The table below outlines our risk/reward profile for the company.


BNNY: This Will Be Ugly - 2


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta



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