Dollar, Nikkei and Gold

Client Talking Points


The USD is signaling immediate-term TRADE overbought vs. both the Euro and Yen this morning, so watch-out if this starts to reverse (this is where the USD Index topped in 2013 as well). Inverse correlations between the USD and big stuff like Oil and Gold are running -0.8-0.9 on 60-90 day correlation durations.


One of the biggest benefactors of Draghi going for the devaluation drugs in May has been Japanese stocks – they love the smell of Burning Yen. The Nikkei’s round trip recovery came on worsening economic data, but it is +17% since May 19th as the Dollar Yen trade got torched.


2014 round-trip for both the CRB Index and Gold on this massive FX move (biggest since 1997, which by the way isn’t a riskless reference point in macro history), and Gold’s exhaustion level on the downside is 1203-1211 inasmuch as the USD Index is exhausted on the upside in the 84.92-85.67 range.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

The Vanguard Extended Duration Treasury (EDV) is an extended duration ETF (20-30yr). Now that we have our first set of late-cycle economic indicators slowing in rate of change terms (ADP numbers and the NFP number), it's time to really think through the upcoming moves of this bond market. We are doubling down on our biggest macro call of 2014 - that U.S. growth would slow and bond yields fall in kind.


Fixed income continues to be our favorite asset class, so it should come as no surprise to see us rotate into the Shares 20+ Year Treasury Bond Fund (TLT) on the long side. In conjunction with our #Q3Slowing macro theme, we think the slope of domestic economic growth is poised to roll over here in the third quarter. In the context of what may be flat-to-decelerating reported inflation, we think the performance divergence between Treasuries, stocks and commodities may actually be set to widen over the next two to three months. This view remains counter to consensus expectations, which is additive to our already-high conviction level in this position.  Fade consensus on bonds – especially as growth slows. As it’s done for multiple generations, the 10Y Treasury Yield continues to track the slope of domestic economic growth like a glove.


Restoration Hardware remains our Retail Team’s highest-conviction long idea. We think that most parts of the thesis are at least acknowledged by the market (category growth, real estate expansion), but people are absolutely missing how all the pieces are coming together to drive such outsized earnings growth over an extremely long duration. The punchline of our real estate analysis is that a) RH stores could get far bigger than even the RH bulls seem to think, b) Aside from reconfiguring 66 existing markets, there’s another 19 markets we identified where the spending rate on home furnishings by people making over $100k in income suggests that RH should expand to these markets with Design Galleries, and c) the availability and economics on large properties for all these markets are far better than people think. The consensus is looking for long-term earnings growth of 28% -- we’re looking for 45%.  

Three for the Road


FX: Draghi continues to burn the Euro, down to $1.27 vs USD, signaling immediate-term TRADE oversold



Stop walking through the motions of a conditioned routine and start consciously taking action on your visualized intent.

-Steve Maraboli


As part of its holiday strategy, Toys"R"Us plans to hire 45,000 seasonal employees at its stores and distribution centers nationwide, more than doubling the company's workforce.

CHART OF THE DAY: An Effective -3% Fed Funds Rate For An Economy That's Allegedly "Humming Along"?


CHART OF THE DAY: An Effective -3% Fed Funds Rate For An Economy That's Allegedly "Humming Along"? - Chart of the Day

Yo, FX Go!

“Listen: there’s a hell of a good universe next door; let’s go.”

-E.E. Cummings


With a body of work that included almost 3,000 poems, E.E. Cummings was one of the most prolific poets in America’s 20th century. If he was around today, he’d probably tell you the aforementioned quote was about centrally planned economies.


You got it, yo. It’s all about jamming our noses into 18th century export-models and burning the purchasing power of The People at the stake. Rip some lip. You know, bro – get those asset prices hooked and up and out of the water!


This is Master of The Universe type stuff. Janet, Mario, Haruhiko - God put you on earth to do this, yo. Let’s go!


Yo, FX Go! - 3gp


Back to the Global Macro Grind


As you can see, when left to my own 45 minutes of creative writing devices in the early morning, I get flashback moments to what my first English professor @Yale deemed “un-grade-able” work …


Getting back to where I have some competence - central questions about centrally planned currencies:


  1. Did the devalued currency model work for the Argentines or Japanese?
  2. What happens when all 3 of the major players in the FX War (Japan, Europe, USA) are at 0%?
  3. Coming off the all-time lows in FX, Fixed Income, Commodity, and Equity volatility, what could go wrong?




  1. No
  2. They’ll tell you that 0 minus 0 is actually greater than 0
  3. Everything


No way. Everything?


Uh, yeah, yo. Let’s go there:


  1. When USD goes up or down, a lot, the machines chase this thing called the Correlation Trade
  2. In 2011, with Buck Burning to all-time lows, the Correlation Trade = Long Commodities, Gold, FX, etc.
  3. In 2014, with Euro and Yens Burning, the Correlation Trade = Short Commodities, Long Nikkei, etc.


Causality or correlation? Please. The causal factor that drives all of this are market expectations that central planners only do one thing when the economic data (always) misses their growth forecasts – they get easier…


Easier, as in dovish = devaluing…


At the first sniff of #EuropeSlowing (in May) Mario’s Italian and French bureaucrat buddies immediately focused on devaluing ze Euros. That gave the USD a surrender bid. Then, as the Abenomics experiment started to fail, the market started speculating that there were another 3-legs to the 3-legged Japanese devaluation stool.


That’s right – 0 minus 0 = moarrr than 0. And 3-legged central planning stools really have 6, or 10 legs. This is so ridiculous at this point that my jokes aren’t funny.


Moving along. If you are into the monthly performance chasing thing, here is the wood (6-week USD correlations):


  1. USD’s 6 week inverse correlation to Gold -0.95
  2. USD’s 6 week inverse correlation to Commodities (CRB Index) -0.93
  3. USD’s 6 week inverse correlation to Brent Crude Oil -0.92
  4. USD’s 6 week positive correlation to Japanese Stocks +0.89
  5. USD’s 6 week positive correlation to Swiss stocks +0.83
  6. USD’s 6 week positive correlation to Austrian stocks +0.82


In other words, as it became glaringly obvious that both Japan and Europe’s economies were slowing, you either bought the living daylights out of the Mother’s Index in Japan or something in Austria, and you crushed it.


“#Boom, crush. Night, losers. Winning. Duh!”

-Charlie Sheen


Oh, and what happens if and when my rates call plays out “fundamentally” – i.e. US #GrowthSlowing here in Q3 (then Q4) takes hold… the Fed freaks, and starts to devalue the Dollar again?


Bingo. This entire bongo board of Correlation Risk turns upside down and you do the opposite, fast.


As a result, volatility (across asset classes) is already signaling to me that we could very well see the mother of all historical volatility breakouts in FX, Commodities, and Equities. But no worries. For now, the central planners call this “price stability”, yo.


Out immediate-term Global Macro Risk Ranges are now:



RUT 1115-1144

VIX 12.91-14.98

USD 84.61-85.33

EUR/USD 1.27-1.30

WTI Oil 90.42-93.95

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Yo, FX Go! - Chart of the Day

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TODAY’S S&P 500 SET-UP – September 25, 2014

As we look at today's setup for the S&P 500, the range is 34 points or 1.07% downside to 1977 and 0.64% upside to 2011.                                                         













  • YIELD CURVE: 1.97 from 1.98
  • VIX closed at 13.27 1 day percent change of -11.12%


MACRO DATA POINTS (Bloomberg Estimates):

  • 8:30am: Initial Jobless Claims, Sept. 20, est. 296k (pr 280k)
  • 8:30am: Durable Goods Orders, Aug., est. -18% (prior 22.6%)
  • 9:45am: Markit US Services PMI, Sept., est. 59.2 (prior 59.5)
  • 9:45am: Bloomberg Consumer Comfort, Sept. 21 (prior 37.2)
  • 10am: Freddie Mac mortgage rates
  • 10:30am: EIA natural-gas storage change
  • 11am: Kansas City Fed Mfg Activity, Sept., est. 6 (prior 3)
  • 1pm: U.S. to sell $29b 7Y notes
  • 1:20pm: Fed’s Lockhart speaks in Jackson, Miss.



    • Senate, House out of session
    • President Obama speaks at UN meeting on Ebola
    • Congressional Black Caucus holds 44th legislative conference: speakers incl. Reps. Lewis, D-Ga.; Rep. Becerra, D-Calif.
    • 9:30am: Gen. David Perkins speaks on role, U.S. Army’s future
    • U.S. ELECTION WRAP: Ads Pulled; Possum Festival; Cosmo Endorse



  • U.S.-Arab Strikes Hit Islamic State Oil Refineries in Syria
  • U.K. Seeks to Criminalize Rigging of Seven More Benchmarks
  • DHL Beats Amazon, Google to First Scheduled Drone Delivery
  • Pimco’s ETF Probe Is Said to Be Separate From Broader SEC Sweep
  • Apple to Release Fix for IOS Update Issues in “Next Few Days”
  • Ford Tops Hiring Pledge Adding 14,000 Workers in U.S. Since 2011
  • Shorting Alibaba Costs 7% to Borrow Shrs Following Biggest IPO
  • Harvard Names Stephen Blyth to Run $36.4b Endowment
  • Gold Downside Risk Seen ‘Significant’ to Goldman Sachs’s Currie
  • GE Said to Pick Banks for Australian Consumer Finance Unit Sale
  • Microchip Deadline to Make Offer for CSR Extended to Oct. 15



    • Diamond Foods (DMND) 4:01pm, $0.15
    • Micron Technology (MU) 4:02pm, $0.81
    • NIKE (NKE) 4:15pm, $0.88 - Preview
    • Progress Software (PRGS) 4:15pm, $0.33
    • Scholastic (SCHL) 7am, ($0.84)
    • Thor Industries (THO) 4:15pm, $1.23



  • China’s Forex Watchdog Uncovers $10 Billion in Fraudulent Trade
  • Currency to Oil Benchmarks Targeted as U.K. Extends Penalties
  • Sweet-Sour Spread Will Narrow Further When OPEC Cuts: Julian Lee
  • Vale Sees China Iron Ore Imports Rising to Absorb Seaborne Glut
  • Copper to Aluminum Fall as Stronger Dollar Curbs Investor Demand
  • Gold Premium in India Seen Doubling as Festivals Fuel Demand
  • Rubber Drops for Five Days to Five-Year Low on Demand Concern
  • UkrAgroConsult to Cut Ukraine Corn Crop Estimate to 25.9m Mt
  • Blackouts Threaten South Africa Growth as Utility Decays: Energy
  • EU Can Cope With Russia Gas Disruption Under Normal Winter: Citi
  • LME Aluminum Canceled Warrants in Detroit Rise Most Since 2012
  • France Imports Wheat From Canada and Belgium in Sept. 24 Week
  • Uganda’s Tea Production on Course to at Least Match Last Year
  • WTI Trades Near 1-Week High as U.S. Supplies Drop; Brent Steady


























The Hedgeye Macro Team

















September 25, 2014

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NKE: Thoughts Into The Print

Takeaway: Futures in-line, but with a meaningful beat. CFO likely to throw out a cautionary FX flag. It’s warranted. But numbers still look good.

While we might not like Nike as much as some of our key long ideas, we’re comfortable owning it into the print on Thursday. The general consensus out there is that we should see an in-line (ish) quarter, with continued strength in futures – and management throwing out an element of caution with guidance given that the Dollar has strengthened 6% against the Euro in the 13 weeks since NKE last gave guidance – and during that time NKE has actually gone up by 5%. We think all of that is true – sort of. Yes, futures are likely trending in the 10% range, and management will almost definitely use the FX environment as a way to keep estimates grounded for the remainder of the year. But the one thing the street is missing is the leverage on the P&L this quarter. The Street is looking for Nike to deleverage 9.3% sales growth into a measly 2% growth in EPS. We think that’s way too conservative.


We think that sales will be up by 12% in the quarter – despite a poor showing by Nike teams in the World Cup, the company definitely turned this into a very commercial revenue event – in traditional Nike style. Importantly, despite what should be a $390mm boost in SG&A (175bp deleverage), Nike should leverage its growth into 12-13 EPS growth. We’re at $0.97 versus the Street at $0.88.   As a point of reference NKE’s $390mm SG&A boost for the quarter is 55% greater than UnderArmour’s entire annual marketing budget.


While we think the quarter will be big, we’re not going to gloss over the near-certain tempered FX-related guidance for the rest of the year. The chart below speaks volumes. No matter how you cut it, a strengthening dollar is bad for Nike’s P&L. If it leads to increased US consumption that could help the business in the home market, but let’s face it…Nike does not need any hand holding in the US to drive its business. Maybe it boosts US tourism abroad a bit, but we’re hard pressed to think that many people travel to distant lands to buy a pair of Nike kicks. Net/net, FX trends are bad. The company has a sophisticated hedging process, that protects it from about 75% of the FX move on its cost of goods (when it receives an order, it uses local currency to buy dollars forward and match its product costs – which are all sourced in dollars). But we’re more concerned about the translation effect of foreign-denominated profits.  Nike does a pretty good job of offsetting the Gross Margin hit and unfavorable translation with hedging – which it does purely on a transactional basis as opposed speculative hedging – and as such, EPS growth is unlikely to slow materially due to FX. But in the 15+ years we’ve covered Nike, we have yet to find a time when investors paid as much in the earnings multiple for better ‘other income’ from favorable hedges as opposed to better organic gross margins.


If the stock were trading at 18x earnings, we could care less. But at a 24x p/e, it’s definitely something to consider.   The other thing that could save Nike in an unfavorable FX environment is SG&A, which should slow dramatically over the course of the year. We’ve got 19% growth in Q1 going down to -1% by Q4 – and it could end up being much less than that. Again, we don’t think that people will pay as much for SG&A leverage as they will for GM improvement, but this is the beauty of the Nike model – they’ll almost always find a way to hit annual growth targets.


NKE: Thoughts Into The Print - nke fx



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