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Best of luck out there,


Darius Dale

Associate: Macro Team

Retail Callouts (9/26): NKE, FINL, SKX, SHLD, GME

Takeaway: NKE - revenue engine white hot, could GM hit 50%. FINL - basketball miss is sign of bigger trend. SKX refutes POS data



NKE - 1Q15 Earnings


Takeaway: Revenue engine revving hotter than people expect, and it will last far longer as well. But whether GM% could approach 50% is key = $8 EPS.


Link to full note: NKE - COULD GROSS MARGIN HIT 50%?


Retail Callouts (9/26): NKE, FINL, SKX, SHLD, GME - 9 26 chart2


FINL - 2Q15 Earnings


Takeaway: For FINL to call-out Basketball as the reason for the comp miss in the quarter is notable for two reasons. 1) FINL is much more tied to the running segment than FL, and 2) Basketball as a category continues to be white hot. Clearly there is more going on here than management cares to comment on. We think that comes at the brand level. NKE last night printed revenues up 70% and DTC up 30%. UA and Adi followed suit in earlier reports - with revenues up 38% and 59% respectively. While brands may claim that this growth doesn't cannibalize business from wholesale partners…we find it hard to believe that argument. We don't think this is specific to FINL either as it is one of the key reasons we added FL to our Short Bench in mid-August.


Retail Callouts (9/26): NKE, FINL, SKX, SHLD, GME - 9 26 chart1


SKX - SKECHERS Comments on State of Business Following Buckingham Research Group Report



  • "We respect the SportScan data released every Wednesday on the footwear business, but when not looked at in its entirety or analyzed over periods of time, and understanding that some key accounts—including Amazon, Zappos, Kohl’s and Finish Line/Macy’s, are not currently reporting and are projected based on the balance of the sector, the data can be misinterpreted or skewed,' began David Weinberg, SKECHERS COO and CFO."


Takeaway: It's not often that you see a company issue a press release mid-quarter to refute research. But, we have to agree with management's conclusions. The fact is that POS data is becoming less and less relevant, dare we say accurate, as company's expand distribution through fully owned DTC channels and pure play e-commerce sites in the US. Those are black boxes that the NPD and SportScan's of the world can't access. Add international to the mix and you have a data set that is far less representative of the global landscape than it was 5 years ago.




SHLD - More problems for Eddie Lampert's empire: Sears Canada CEO quits



  • "On Tuesday, Sears Canada said its CEO, Doug Campbell, was quitting after only a year on the job: bad timing given its parent company is trying to sell off the Canadian unit to raise urgently needed cash. Earlier this week, the New York Post reported that the auction for Sears Canada, in which Sears has a 51% stake, had stalled."


SHLD - Sears Investor Fairholme Says Unit Steps Back From Loan



  • "Sears Holdings Corp. shareholder Fairholme Funds Inc. said its affiliate St. Joe Co. backed away from providing as much as $100 million in financing to the retailer after a second lender materialized."


L’Oréal Acquires Sayuki Custom Cosmetics



  • "L’Oréal has added to its cache of West Coast beauty brands by acquiring Laguna Hills, Calif.-based Sayuki Custom Cosmetics."
  • "A spokesman for L’Oréal confirmed the acquisition Thursday, but did not provide further comment or disclose the terms of the deal. Industry sources estimate the company paid $150 million for Sayuki, which joins a growing list of West Coast pick-ups for L’Oréal that include NYX Cosmetics, Clarisonic, Urban Decay and Baxter of California."


GME - GameStop gears up for the holidays



  • "GameStop plans to hire approximately 25,000 employees nationwide as the company prepares for the upcoming holiday shopping season — nearly double the number of people it hired last year."


WTSL - The Wet Seal taps new chief digital officer



  • "The Wet Seal is welcoming back Jon Kubo, this time as EVP and chief digital officer, a newly created position. Kubo will oversee e-commerce, digital marketing and the information technology organization to integrate digital consumer experiences across all business touch points."

Bubbles, Bonds and China

Client Talking Points


The Russell 2000 is down -4.2% since the BABA #bubble was issued, taking its draw-down from its all-time #bubble high (July 7th) of 1208 to -8.1%; yesterday’s close of 1110 was a lower-closing-low than August; keep selling bounces.


The UST 10YR is straight back down to 2.49% this morning after failing at both our TRADE and TREND lines of resistance; with it -18% year-to-date, and the Fed primed to get dovish on the margin if jobs and/or GDP miss, keep buying Long Bond dips.


China is up for the last 3 days making a fresh year-to-date closing high of +14.6% on the Shanghai Comp, evidently Chinese locals couldn’t care less about the liquidity bubble in small cap U.S. stocks imploding. Interesting divergence. We like it.

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


The whole Chinese iron ore/steel thing seems even uglier now.



Never let the opinion of another affect your opinion of yourself.

-Teresa Mummert


Nike reported a blow out quarter coming in at $1.04 (the Street at $0.88) futures looked outstanding at 11%, with a 400bp sequential turn higher in North America to +15%.

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Hydra-Headed Fed

This note was originally published at 8am on September 12, 2014 for Hedgeye subscribers.

“A monster, a hydra-headed monster…”

-Andrew Jackson


That’s what President Andrew Jackson called the Bank of The United States as he took office in 1829 – a “hydra headed monster equipped with horns, hoofs, and a tail so dangerous that it impaired the morals of our people, corrupted our statesmen, and threatened our liberty.” (Hamilton’s Curse, pg 69)


And that’s what I am going to call Ben Bernanke’s legacy as of this morning – the Hydra-Headed Fed. After doing what he allegedly did at a super secret Morgan Stanley lunch yesterday, that is exactly what this man deserves – someone calling him out on a new and tangible market risk that he just created.


Hydra-Headed Fed - hydra bernanke


Again, allegedly (because I wasn’t there), Bernanke recklessly told a group of investors that US GDP growth was going to surprise to the upside (i.e. be better than 3% consensus) and that he could not believe the 10yr was still trading under 3%. In Fed whisper speak, that’s code for Janet is going to get more hawkish (look at the intraday chart, post lunch) … but is she?


Back to the Global Macro Grind


Notwithstanding the fact that Bernanke was getting paid bank to whisper these sweet nothings into the ears of those with a seat at the almighty’s table, is this what the “transparent” and “accountable” Fed wants? Is Bernanke on the same page as Janet? Or, fully loaded with Draghi talking up the drugs in Europe, is this hydra-headed-un-elected beast out of communication control?


If you don’t think this matters, think again. And think of it in risk terms (i.e. what happens if something like the opposite happens at the Fed meeting next week). What happens if and when Janet Yellen says, ‘hey, I want to be “data dependent” and the recent employment and housing data slowed’?


In real-time market risk management terms what Bernanke’s comment does is:


  1. Widens the immediate-term risk range of the 10yr to 2.33-2.58%
  2. Ups the probability of accelerating bond market volatility
  3. Confirms the recent breakout in foreign currency volatility


In other words, the Hydra-Headed Fed is going to perpetuate the one thing Bernanke trumpeted (both in 2007 and now) as his great success – eviscerating market volatilities.


If you don’t follow it as closely as some of us do, the context of this moment in US central planning history is as critical as it gets. You have to go all the way back to when the Jeffersonians crushed Hamiltonian big government guys (200 years ago) to get what I think The People are really going to get right if the Fed, ECB, and BOJ create the next crisis.


They are going to get that these Policies to Inflate didn’t work.


For the economy, that is…


Now if you ask some of the perma bull economists out there how the economy is doing, it’s just peachy. Yesterday, I think Nancy Lazar wrote that US “consumer confidence is breaking out to the upside.” Maybe Wall Street consumer confidence is… but, please, do not confuse that with the real America’s confidence in negative purchasing power and real wage growth.


By the Federal Reserve’s own admission (they published this research last week), 2/3 of Americans never left being in a recession. Median incomes declined -5% for the bottom 60% of Americans over the 2010-2013 period as the cost of living in the US has ripped to all-time highs.


Oh, but gas prices are going to fall (then rise)… right…


Again, this is where the Hydra-headed monster of market expectations really matters – it’s called correlation risk:


  1. When Fed heads use communication tools to talk up rate hikes (like Bernanke just did) USD and rates rise
  2. When USD and rates are rising, at the same time, commodities, oil, Gold, etc. go down
  3. The machines (quants) then chase macro correlations, and macro markets get overbought/oversold


After the biggest weekly rate of change move for the currency market since 1997 (not a good reference date for globally interconnected macro risks!), on a 6 week duration, here’s the macro market’s current correlation to USD:


  1. Euro vs USD = -0.99
  2. Silver vs USD = -0.93
  3. Gold vs USD = -0.90
  4. Brent Oil vs USD = -0.74
  5. SPX vs USD = +0.72


That’s why I use the word “recklessly” to describe what Bernanke did yesterday. If Yellen doesn’t talk up the US Dollar and Rates (which Americans should love by the way), the entire macro trade dominating markets right now can easily (and quickly) reverse.


Is this normal? Is this acceptable? Was this the America we all like to think of as “free market capitalism”?


If there ever was a day to be scared of the monster of expectations that both the Fed and Old Wall has created, this is probably it.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.33-2.58%

SPX 1984-1999

RUT 1154-1181

USD 83.66-84.91

EUR/USD 1.28-1.30

WTIC Oil 91.64-95.36

Gold 1234-1281


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Hydra-Headed Fed - Chart of the Day

#Preppers Await!

“We are the ones that we have been waiting for.”

-Alice Walker


“So,” how is everyone feeling this morning? I’m feeling great.


Since I’m running out of fresh content on both shorting the Russell 2000 (IWM) and buying the Long Bond (TLT), today I decided to weave a little Alice Walker (she wrote The Color Purple in 1982) with some perma-bear prepping.


If you don’t know what a #prepper is, look it up. On Wiki you’ll be re-directed to “Survivalism” and on the Googler you’ll get everything from “How To Build Your Own Bunker” to “Getting Ready For Barackalypse.” There’s always a bear market somewhere!

#Preppers Await! - r5


Back to the Global Macro Grind…


When you see me going all bear-mauler in the introduction to a research note, you buy/cover.


Yep, that’s pretty much the call this morning. I call it fading myself. If you didn’t buy and/or cover the swan dive that the SP500 took into yesterday’s close, you aren’t a real bull anyway.


Oh, and don’t forget to sell the “GDP is back” bounce by noon. Damn day-traders.


Forget the traders, how about them damn moving monkeys? Huh? Did Mucker call me a monkey? No. No. I would never call anyone names. I’m referring to this billion dollar app thing that I built for my 6yr old son called Monkey In The Middle.


Here’s how it works:


  1. It has a 1yr chart
  2. It has a simple moving avg
  3. It has a ticker box


And voila! That’s it. So easy a kindergartner can do it. He can analyze any ticker in the world, across asset classes!


Other than this being the most myopic single-factor interpretation of risk since the caveman throwing grass into the wind, the problem I foresee with this billion dollar idea is what happens when my son starts doing wacky stuff like multiplication.


Or, what if he figures out that moving monkeys are different if he uses a simple vs. an exponential moving average? Then my app is dead. But, in the meantime, you never know, yo. There’s an app for that too btw (it’s called “yo” – you say yo to me, I say yo back).


Serious question though, what is the 50-day Moving Monkey?


  1. Is it 1978 (exponential moving avg) or 1976 (simple moving avg) for the SP500?
  2. Or, is it 1151 (exponential moving avg) or 1148 (simple moving avg) for the Russell 2000?


I am not messing around here guys. If I am going to start building my family a legitimate bunker, I need to know what the signal is! Will using the exponential one help me front-run the simple ones? In the bush (with bears), all I need to do is out-run the last guy.


In all seriousness, the entire linear concept of using the 50-day is as ridiculous as the ideology that the Federal Reserve, European Central Bank, and Bank of Japan, can collectively bend gravity.


Moving along…


Does your iPhone bend? The stock did yesterday. It moved 2x what the market did, signaling immediate-term TRADE oversold within its bullish intermediate-term TREND setup. “So” I signaled buy AAPL (Apple) yesterday.


If we get the Q2 “GDP is back” bounce (newsflash: next week it will be Q4), I want to own the real bubbly stuff. Remember when The Facebook (FB), Apple (AAPL), and BABA had a projected $1 TRILLION in combined cap? I do. That may have been the top.


Tops are processes, not points. And the thing about the real bubbly ones is that you can risk manage them for a little while with a bullish bias (commonly called buying the damn dip). But there will come a time when they pop. Try it at home – those don’t bounce.


This is where I use my immediate-term Risk Range process (sorry Jack, our app doesn’t have real-world application!):


  1. SP500 signals immediate-term TRADE oversold at 1962, within a bullish intermediate-term TREND
  2. Russell 2000 signaled immediate-term TRADE oversold at 1104, within a bearish TREND
  3. Front-month VIX signals immediate-term TRADE overbought at 15.92, within a bullish TREND


In other words, both volatility and the SP500 are bullish on an intermediate-term duration and the Russell 2000 small-cap #bubble is bearish across all durations. “So” on the oversold signals, you keep your small cap shorts on and buy big cap liquidity (AAPL).


If you’re longer-term, and not into managing the immediate-term risk of the range… and are right freaked out about something like the #Quad4 (US growth and inflation slowing at the same time), #preppers have a ton of stuff to sell you. Someone should definitely IPO that!


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.42-2.58%


RUT 1104-1138

VIX 13.48-15.92

USD 84.64-85.53
Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


#Preppers Await! - 09.25.14 TLT vs. RTY

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