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Retail Callouts (8/6): UA, NKE, FDO, DG, DLTR, URBN, JCP, TGT

Takeaway: Kevin Durant leaving Nike for UnderArmour is a lot for UA to handle. It validates our endorsement note from last night.



Thursday (8/7)

TUMI - Earnings Call: 8:30am

HSNI - Earnings Call: 9:00am

ADS - Earnings Call: 9:00am




UA, NKE  - NBA star Kevin Durant bails on Nike as Under Armour prepares huge offer



  • "The NBA's Most Valuable Player was supposed to be at Nike Inc.'s Oregon headquarters today. He didn't make the trip. That could be good news for Under Armour Inc., which reportedly is set to offer Oklahoma City forward Kevin Durant a lucrative endorsement deal. Durant's contract with Nike expired last week and he abruptly canceled a scheduled visit to Nike."
  • "Michael McBride, Under Armour's senior manager of sports marketing, today tweeted: 'Wish I could tell everyone what is going on today.' The tweet included a photo of some Under Armour-branded bottled water on a basketball court and a note pad that appeared to be set up for a presentation. It also included four hashtags: '#Future #GoodPeople #Recruiting #Partnerships.'"
  • "That tweet could be referring to anything. But it comes as the New York Daily News reports Baltimore-based Under Armour is ready to pay Durant up to $30 million a year for an endorsement deal. Durant's Nike contract paid him $60 million over seven years."


Retail Callouts (8/6): UA, NKE, FDO, DG, DLTR, URBN, JCP, TGT - chart1 8 6


Takeaway: We'll play along with the conspiracy theory on this one as it pairs nicely with the note we published last night looking at endorsement obligations for both NKE and UA (Link - CLICK HERE). If the KD deal closes with UA at the reported $30mil per, the company would have to generate an incremental ~$275mm in sales to make that margin accretive. Not outside of the realm of possibility, but consider two things. 1) In 2013 the KD grossed $175mm, 2nd only to the Lebron at $300mm. 2) That $275mm is a 75% premium to what UA has done in all of footwear over the past 12mnths. At NKE that's just 1.1%. It may be a brand builder for the company, but without a Nike-esque product and marketing engine behind KD, it's tough to see this benefiting margins in the short term.


FDO, DG, DLTR - Dollar General Said to Explore Family Dollar Bid



  • "Dollar General Corp. is weighing a bid for Family Dollar Stores Inc. that would challenge Dollar Tree Inc.’s $8.5 billion takeover of the discount retailer, people with knowledge of the matter said."


Takeaway: We could argue that a combined FDO/DG may generate more cost efficiencies on the product side due to the overlap in merchandise, and subsequent buying power with vendors. In addition, the real estate profile is more complementary for DG/FDO than many might initially think. That said, the reason the real estate is complementary is that DG has -- for the most part -- very good locations, while FDO's leaves much to be desired. We'd have to argue that synergies would be considerably better here than with DLTR in order to justify paying more than the 11x EBITDA that's already in play.


URBN - Unveils Android App


Retail Callouts (8/6): UA, NKE, FDO, DG, DLTR, URBN, JCP, TGT - chart2 8 5


Takeaway: Interesting that this only available now with dot.com such a big part of URBN's business accounting for about 26% of net sales. We hear so much about the importance of mobile, but put into context we think we can explain why this was so low on the priority list. Dot.com represents about 6% of total retail sales. Mobile and tablets account for almost 20% of that (or 1.1% of total retail sales). 80% of that comes from Apple devices, and only 20% from Android (.2% of total retail sales).




JCP - J.C. Penney opens its first-ever store in Brooklyn on Aug. 29



  • "J.C. Penney Company will open its first-ever store in Brooklyn, further increasing its New York City footprint, on Aug. 29. The all-new 124,000-sq.-ft., single-level store, located in Gateway Center, will provide a look at Penney's updated store model, which includes a new footwear format, an increased focus on jewelry, and new energy efficiency standards."


UA - Former president of ESPN joins Under Armour board



  • "Under Armour announced that George W. Bodenheimer, former president of sports network and entertainment company ESPN has joined the company's board of directors."
  • "Bodenheimer is an ESPN and cable industry pioneer, having served as the company's longest-tenured President from 1998 to 2012, during which time he led an unprecedented period of global growth."


TGT - Target Opens Tech Outpost In Sunnyvale



  • "Target has opened a small tech hub in Sunnyvale, not far from a major tech outpost of its archrival, Wal-Mart."
  • "Target’s new office will consist of 15 to 20 workers for now, with the possibility of expanding to as many as 70, a company spokesman told the Star-Tribune. The hub’s focus will be on online and mobile data analytics and engineering, and will be separate from Target’s Technology Innovation Center, which opened in San Francisco last year."


GNC - GNC Holdings, Inc. Names Michael G. Archbold CEO



  • "GNC Holdings, Inc., a leading global specialty retailer of health and wellness products, today announced that its Board of Directors has appointed senior retail industry executive Michael G. Archbold, 53, as Chief Executive Officer and member of the Board, effective immediately. The Board also announced that Joseph Fortunato, Chairman, President and Chief Executive Officer, is leaving the Company and has stepped down from the GNC Board. Lead Independent Director, Michael Hines, has been elected Non-Executive Chairman of the GNC Board."



Takeaway: The MBA Purchase Applications Index sits at 170 3QTD, down -4.8% QoQ and the lowest quarterly reading since 3Q 1995

Our Hedgeye Housing Compendium table (below) aspires to present the state of the housing market in a visually-friendly format that takes about 30 seconds to consume.


*Note - to maintain cross-metric comparability, the purchase applications index shown in the table below represents the monthly average as opposed to the most recent weekly data point.


VANISHING 3Q14 PURCHASE VOLUME - Compendium 080614



Today's Focus: MBA Mortgage Applications

The Mortgage Bankers Association today released its weekly mortgage applications survey data for the week ended August 1st.

The Composite index rose +1.6% WoW.  However, refi activity was the singular source of strength (+3.8% WoW) as Purchase demand slide -1.3% sequentially.


  • Vanishing Purchase Volume:  The Purchase Index printed at 166.5, its fourth straight week at the 160-level.  For context, on a rolling 4-wk average basis, demand is sitting just above the peak weather distortion lows observed in February while average purchase demand for 3Q to-date is currently tracking at its lowest level since 1995.  In short, housing demand as captured by the MBA series – which purports to cover 75% of total application volume – is off to a discretely inauspicious start for 3Q.  
  • Refi & Rates:  Refinance activity increase +3.8% WoW despite rates on the 30Y FRM contract ticking up to 4.35% -  the first increase in 3 weeks.  Refi activity remains down -39% YoY and continues to improve as we traverse through the easiest 2013 comps. 


Summarily, the high frequency housing data continues to corroborate the sea of red currently blanketing our housing compendium.  As we’ve highlighted repeatedly, we’re inclined to remain bearish on the housing complex until the slope of HPI deceleration inflects.


VANISHING 3Q14 PURCHASE VOLUME - Purchase Index Qtrly Ave






VANISHING 3Q14 PURCHASE VOLUME - Purchase Apps LT w summary stats


VANISHING 3Q14 PURCHASE VOLUME - Composite LT w summary stats




About MBA Mortgage Applications:

The Mortgage Bankers’ Association’s mortgage applications index covers more than 75% of mortgage applications originated through retail and consumer direct channels. It does not include loans delivered through wholesale broker and correspondent channels. The MBA mortgage purchase applications index is considered a leading indicator of single-family home sales and construction. Moreover, it is the only housing index that is released on a weekly basis. 



The MBA Purchase Apps index is released every Wednesday morning at 7 am EST.



Joshua Steiner, CFA


Christian B. Drake




Client Talking Points


Our intermediate-term TREND signals broke over a month ago, and now you’re seeing the draw-down percentages add up.  Italy is -13% since its June top and Germany (DAX) has had a -10% drop since topping July 3rd (a week before the Russell did).


The front month VIX is +63.5% since the Q2 bounce failed to make higher-highs (Russell 2000). Our TREND breakout line is 11.94, so what’s born out of this scenario is wider risk ranges (our 3-day range for the SPX is now over 100 points – last month it was 30-35 wide).


UST 10YR should test fresh year-to-date lows here as Yield Spread (10yr minus 2yr) compresses to +199bps wide (its year-to-date lows). These are clean cut #Q3Slowing signals in our model, so we’re sticking with the Long Bond as our best asset allocation idea.

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


HOUSING: MBA purchase app index down another -1.3% this wk - horrendous trend, on the margin $ITB -- @KeithMcCullough


We work to become, not to acquire.

-Elbert Hubbard


The VIX has ripped +63.5% from the time we made our #VolatilityAsymmetry slide deck presentation.

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CHART OF THE DAY: Growth Slowing, Inflation Decelerating


CHART OF THE DAY: Growth Slowing, Inflation Decelerating - Chart of the Day

Diffusive Thoughts

Opportunity is missed by most people because it is dressed in overalls and looks like work.

-Thomas Edison


I recently picked up a new book called, “A Mind for Numbers”.  The book is written by Dr. Barbara Oakley, a professor of engineering at Oakland University, who, like many people, struggled with math and sciences while in high school.  Unlike most people with these struggles, she went on to become a very prominent professor in a very math oriented field.


The essence of the book is really about how to make a break through while studying any subject.  In doing so, the book proposes on relying on the two modes that our brains naturally work in: focused and diffused.  In focused thinking your brain logically works through problems in a careful and attentive manner. Meanwhile, diffused thinking occurs more in the background, your brain processes while you are doing other things like jogging, driving, playing sports, and so on.


Some of the most productive thinkers of our time actually systematically shifted theirs brains between the two modes.  In particular, Thomas Edison had a unique trick for shifting how his brain was operating.  Edison was known for his focus and work ethic, but he would also often take “cat naps” during the day.


During these small naps while sitting in a chair in his laboratory, Edison would hold a steel ball in his hands. As he would nod off into a deeper and deeper sleep, Edison would drop the ball and it would fall to the floor and naturally wake him. Thus Edison was able to switch into diffusive thinking, without getting into a much deeper sleep that would potentially make him groggy and slow his efforts.

Now for many of us stock market operators, a mid-day nap on the trading floor is probably not practical, but as Oakley writes in her book:


“The key is to do something else until your brain is consciously free of any thought of the problem.”


In effect, you need to distract your brain, so you can shift into diffusive thinking, so that the big picture part of your brain can kick into gear and help you solve the problem at hand. 


Diffusive Thoughts - EL chart 2


Back to the Global Macro Grind . . .


Like many of you, we tend to get in early and grind away at Hedgeye, but lately we have also been doing some diffusive thinking. On this front yesterday, my colleague Darius Dale prepared a 50 page presentation yesterday (after some long walks around our office park) that is titled, “Are You Prepared for Quad #4?”


As most of you know already, we look at economies based on our propriety GIP model (growth, inflation and policy).  In our view, as supported by historical studies, asset price returns are driven by shifts in growth, inflation and policy within an economy.  In the Chart of the Day, we highlight this graphically with a definition of the four quadrants.  Quad 4 occurs when growth slows and inflation decelerates, which typically elicits a dovish policy response.


If you’d like to see the full length presentation, please email your institutional sales contact or simply email .  Also CLICK HERE for a short video that Darius did on HedgeyeTV going through the key points.

A key catalyst for a shift in our thinking, aside from long walks or baths, has been the break out in the U.S. dollar. As Darius notes in the presentation, the investment conclusions from a shift into Q4 for the domestic economy are as follows:

  • Bonds over stocks;
  • Defensive equities over cyclical equities;
  • Late cycle investments over early cycle investments;
  • Buy U.S. dollar and short commodities.

As it relates to translating this directly into what we would recommend selling and owning under this scenario, we’d focus on the following:

  • Long – Long term treasuries (TLT), Muni Bonds (MUB), Healthcare (XLV), and Old China (FXI)
  • Shorts (or Underweights / Sells) – Russell 2000 (IWM), High-yield credit (JNK), Homebuilders (ITB), Regional Banks (KRE), Retailers (XRT), and Eurozone (EZU)

On the last point of selling the Eurozone, over the last month European equities have been getting crushed.  Every major European equity index is down over the last month ranging from the U.K. down -4% to Russia down -14%.  Germany is also clearly in the midst of a World Cup hangover as German benchmark equities are down -9.5% and now down over 5% for 2014.


Speaking of Germany, German factory orders were an unmitigated disaster for June.  Consensus expectations were for an increase of 0.9% from May and the actual number came in at -3.2%.  On a year-over-year basis, the numbers were just as abysmal as factory orders that declined -2.4%.  This marked the largest decline since September 2011.  For those long of Germany, hopefully Oktoberfest is a positive catalyst!


Switching gears for a second, our Restaurant and Consumer Staples Sector Head Howard Penney has had a very successful alpha generating year within the restaurant sector and after rolling up his sleeves, focusing, and then taking a break (yoga?) to diffuse the thoughts, he has a healthy pipeline of Best Ideas in the Consumer Staples Sector.


The next idea he is rolling out will be a short call on Hain Celestial Group (HAIN).  We added the idea to our Best Ideas list as a short on Monday and the deep dive call on the name will occur on Thursday August 14th at 1pm eastern.  If you’d like the materials for the call, please email sales at Hedgeye (this call won’t be pro bono though, alpha doesn’t come cheap!).


Keep your head up and stick on the ice,

Daryl G. Jones

Director of Research


Diffusive Thoughts - Chart of the Day


Mass stalled for the 2nd straight month with July Mass segment growth at least 1,000bps below consensus growth estimates.  Our Mass Decelerating thesis is occurring faster than we thought.



The Street’s bullish thesis of Mass in overdrive has grinded to a halt with the release of the July Macau detail.  Mass revenue grew only 17% YoY, well below our projection of +24% and consensus of +30%.  The disappointing Mass performance is in line with our Mass Decelerating theme for 2H 2014 but the slowdown is occurring faster than even we thought.  As we highlighted in our 06/13/14 note “MACAU: HANDICAPPING MASS DECELERATION”, July 2013 was the month where the concessionaries jacked up the table minimums on most of their Mass tables.  Turning to VIP, hold percentage for the market was normal, not low as we had anticipated – so the VIP downturn was entirely volume driven.


Looking ahead to August, we see sequential improvement to flat to low single digit YoY GGR growth.  The calendar is actually favorable with one extra Saturday in August 2014 (DICJ reports data with a 1 day lag).  For that reason, Mass should look slightly better than July, potentially up high teens to low 20s%.


LVS, WYNN, and Galaxy were the market share winners in July relative to trend

but in the case of LVS, the market share gain was entirely hold driven as the company lost share in both Mass and VIP Rolling Chip.  Galaxy remains the only operator we like from a stock perspective.  LVS looks vulnerable given our Decelerating Mass theme coupled with the macro issues in Singapore.


Here are some takeaways:



  • Mass revenue grew only 17% YoY, well below expectations, following June’s disappointing 27% gain.
  • July’s Mass growth was the lowest since July of 2009
  • Adjusting for direct play, VIP hold percentage was normal in both July of 2014 and July 2013
  • Rolling Chip (RC) volume fell 13%, the worst performance since March of 2009




  • What looked like a solid month for the Sands China properties now looks disappointing
  • The properties held high on VIP (including Direct) at an estimated 3.44% versus 3.23% last year and average hold of 3.01%
  • Despite GGR share in July above recent trend, Mass and RC volume share both fell below recent trend
  • GGR actually fell for the 1st time since September 2011
  • YoY Mass revenue growth of 15% was the worst performance for LVS since January 2011
  • RC volume fell 19% YoY on top of June’s 27% decline


  • On a relative basis, Wynn Macau actually had a decent month
  • The property gained share relative to recent trend in all segments
  • GGR growth of 6% led the market driven by a 36% increase in Mass
  • VIP hold percentage was slightly above normal but well above July 2013


  • MGM’s relative performance was hindered by low VIP hold estimated at 2.31% versus an average of 2.88%
  • Market share improved versus recent trend only in RC volume but fell sequentially in VIP and Mass revs
  • YoY Mass growth of 40% led the market while the RC volume decline of 9% was 2nd best


  • Another disappointing month 
  • GGR share fell below recent trend driven by RC volume and lower relative hold %
  • Hold percentage was an estimated 2.61% versus average hold of 2.95%
  • Mass revenue grew in line with the market at 17% but RC volume fell 21%

Galaxy Entertainment:

  • On a relative basis, July was a strong month for the Galaxy properties
  • GGR share was slightly above trend but Mass share grew sequentially and so did RC share
  • GGR was flat YoY but held back by a low VIP hold percentage
  • Mass growth was in line with the market but Galaxy was the only company to post YoY growth in Rolling Chip volume