PODCAST | McCullough: What Do You Do When the Market Is Overbought?


Hedgeye CEO Keith McCullough sweeps the globe, discussing the latest global macro market internals, economic trends, and how investors should be positioning themselves as we head into Q2. 

Daily Trading Ranges, Refreshed

Takeaway: As we look at today's setup for the S&P 500, the range is 24 points or 0.98% downside to 1854 and 0.30% upside to 1878.

Editor's note: This unlocked edition of Daily Trading Ranges was originally published April 2, 2014 at 8:22 am. For more information on how you can receive these levels every morning in your inbox click here.

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Retail Callouts (4/2): UA, NKE, EBAY, MKS, DDS, FDO

Takeaway: Odd statement by new UA running head. MKS snubs US retail market. EBAY goes same-day delivery. New Balance grows faster than NKE and AdiBok.



UA - 3 Questions for Under Armour's Fritz Taylor



  • "Under Armour Inc...bolstered its running team by naming industry vet Fritz Taylor as VP of running...Taylor, who was most recently VP and GM of running at Norcross, Ga.-based Mizuno, also has worked for Seattle-based Brooks and Beaverton, Ore.-based Nike Inc."
  • What’s your take on Under Armour’s position in the running market? 
    • FT: "...Everyone here would admit that Under Armour has had some fits and starts — hit and misses, if you will — particularly on the footwear side. But the Speedform Apollo just launched, and it’s getting some really strong sell-through numbers, and it’s a shoe that people are saying [is] something unique that no one else can do. We’ve got a nice foot in the door that we can leverage for bigger things."
  • Is the consumer open to new brands and ideas in running?
    • FT: "...minimal, even though it has waned, brought some energy and excitement around new concepts. Now the big thing is maximal, but a bigger thing is that runners are more switched on to new, innovative ideas and stories that can help improve their running experience."
  • Is it different working at an apparel company that makes footwear than at a footwear company that makes apparel?
    • FT: "You can absolutely tell [the difference]. One thing I was just dealing with is that here we have to wait for apparel to set the colors [for the season], and at every other company I’ve worked for, the footwear team operated that. That immediately slapped me in the face this week: 'Oh, wait, I need to wait for apparel.'”


Takeaway: That last answer 'footwear needs to wait for apparel' is logical for a company like UnderArmour, but the reality is that it is probably the wrong answer. The best companies (Nike) run apparel and footwear product creation in tandem. The chronic underperformers (Adidas) run the business in a series circuit (first apparel then footwear in AdiBok's case). Again, that's probably ok for UnderArmour where footwear is still in its infancy. But this process will need to evolve if UA wants to be considered a real footwear company.


EBAY - eBay Signs Retail Chains to Same-Day Delivery Service



  • "...the eBay Now service is exclusively for local brick-and-mortar retailers in certain cities: San Francisco and the Peninsula, San Jose, parts of New York City, Chicago and Dallas.
  • While Best Buy, AutoZone and ToysRUs were among the first retailers to participate in eBay Now, the list of retailers now participating include the following featured stores: The Home Depot; Office Depot; Walgreens; GNC; Radio Shack; Macys; Microsoft; Guitar Center, Bloomingdale's and Urban Outfitters."
  • "Others retailers include Ann Taylor Loft, Armani Exchange, Barnes & Noble, Bed Bath & Beyond, Champs, Crate & Barrel, Eastern Mountain Sports, FootLocker, FootAction, GameStop, Golfsmith, JCPenny, Jonston & Murphy, Journeys, Kmart, Pier One Imports, Quiksilver, Staples and Sunglass Hut."
  • "Last fall, eBay said it would expand eBay Now same-day delivery to 25 U.S. markets by the end of this year as well as international locations such as London. The company acquired Shutl last year, allowing eBay to move from hiring "valets" to deliver goods to using a marketplace approach."


Takeaway: eBay has recruited a pretty powerful list of partners in its push to build same-day delivery capabilities. This is brick and mortars response to AMZN's local express. Pretty easy sales pitch for EBAY as it gives retailers the opportunity to pool resources to compete with Amazon. Only thing that remains to be seen is if this courier based logistics network can scale to support the potential demand from bigger boxes.



MKS - Marks & Spencer plans massive international expansion



  • "Marks & Spencer intends to open 250 new stores outside the UK in the next three years as part of significant global expansion plans. Marc Bolland, chief executive, revealed that the high street retailer is looking to grow its international sales by 25pc and profits by as much as 40pc."
  • "Although it is retrenching in China - closing or relocating up to a third of its existing stores in Shanghai and seeking help from a local partner before it expands nationwide - it will open new stores in western Europe, India and the Middle East. Its plans include flagship stores in major cities but also 20 standalone food stores in Paris and a collection of new dedicated lingerie and beauty stores."
  • "Marks & Spencer Lingerie & Beauty has already opened at two locations in Saudi Arabia, with 10 further stores planned in the next two years."
  • "M&S has also earmarked 20 sites in India for the lingerie and beauty concept, which is smaller than the company’s traditional stores. In total, M&S wants to have 100 stores in India by 2016."


Takeaway: Marks & Spencer is a quality retailer by most measures, and the International expansion makes a lot of sense. Though the most interesting takeaway for us is that it wants to grow in most major markets that are NOT the US. How's that for a statement by a major International retailer with over 1,000 stores that it thinks that the US is overstored?


New Balance - New Balance Sees Double-Digit Growth in 2013 



  • "New Balance Athletic Shoe reported 2013 worldwide sales of $2.73 billion, a gain of 14.2 percent over 2012 reported worldwide sales of $2.39 billion."
  • "The 14.2 percent gain marks New Balance's third straight year of double digit growth with sales rising 12.2 percent in 2012 and 14.6 percent in 2011."


Takeaway: This is really impressive for New Balance. We don't often hear much about its growth due to the fact that it is private. But 14% sales globally on a base of $2.5bn ain't half bad. One thing we'd note is that NB has been aggressively growing its own retail presence, which boosts the top line to an even greater degree relative to having a pure wholesale model. But it's quality growth nonetheless.  Looked at a different way, it outgrew Nike and Adidas.




Japan Dept Stores' Sales Surge Ahead of Tax Hike



  • "Japanese department store retailers saw their March comps surge at a double-digit pace as consumers rushed to make purchases before a consumption tax hike went into effect on Tuesday."
  • "Japan's sales tax increased from 5 percent to 8 percent on April 1. Economists and observers are questioning whether the tax hike- the first for the country since 1997- will derail Japan's economic recovery and dent a recent rebound in luxury goods. But for March at least,department stores enjoyed brisk business as consumers stocked up on apparel, jewelry and other items. On the lower end of the market, Fast Retailng's Uniqlo chain saw almost no impact, posting nearly flat comps for the month."




DDS - Wells Fargo and Dillard’s Announce New Credit Card Agreement



  • "Wells Fargo & Company and Dillard's, Inc. announced today that the two companies have entered into an agreement for Wells Fargo to fund, issue and service Dillard's-branded private label and co-brand credit cards. Wells Fargo will also manage the cardholder loyalty program for Dillard's."
  • "The program agreement has a 10-year term and is anticipated to become operational in the fourth quarter of 2014, following the scheduled expiration of Dillard's current program agreement. Financial terms of the agreement were not disclosed. Dillard's management believes its earnings from the new program exclusive of startup costs will be comparable to its historical earnings from the Dillard's branded credit card products and believes that earnings will increase with future program growth."


FDO - Family Dollar Expands Food Assortment



  • "Family Dollar…announced today it is introducing more than 400 new food items in each of its more than 8,000 stores across the country."


PERY - Carmine Petruzello Exits Perry Ellis



  • "Carmine Petruzello has left his post as president of the Perry Ellis division of Perry Ellis International Inc. The company confirmed his departure, saying he left 'to pursue other opportunities,' and there are no plans to replace him at this time."

investing ideas

Risk Managed Long Term Investing for Pros

Hedgeye CEO Keith McCullough handpicks the “best of the best” long and short ideas delivered to him by our team of over 30 research analysts across myriad sectors.

VIDEO | Keith's Macro Notebook 4/2: VIX INDIA OIL

Loving Us Some India!

Client Talking Points


The VIX closed < 14.72 Hedgeye TREND yesterday. Looking at  front month Volatility on the equity side, we’re going to get an oversold signal here. On our immediate term TRADE duration the VIX will be oversold around 13.01. That means that the equity market is immediate term TRADE overbought. Consider that immediate term signal within the inverse relationship that is Volatility versus Price in the S&P 500. The immediate term TRADE overbought line for the S&P 500 is 1888.


One of our favorite Emerging Markets right now, the BSE Sensex continues to shine +0.5% to +6.8% year-to-date. This continues to work in the face of not only some political reform, but the currency not going down in a blazing ball of fire anymore. What you get here in India this morning is another positive divergence versus the region. You’d rather be long India on the equity side. Dr. Raj continues to deliver. Hedgeye macro analyst Darius Dale has been all over this one.


Oil remains bearish TREND Hedgeye with Brent down hard at $104.65 this morning, which for the consumer, who’s getting plugged by inflation, is a very good thing.

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 out 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.


Darden is the world’s largest full service restaurant company. The company operates +2000 restaurants in the U.S. and Canada, including Olive Garden, Red Lobster, LongHorn and Capital Grille. Management has been under a firestorm of criticism for poor performance. Hedgeye's Howard Penney has been at the forefront of this activist movement since early 2013, when he first identified the potential for unleashing significant value creation for Darden shareholders. Less than a year later, it looks like Penney’s plan is coming to fruition. Penney (who thinks DRI is grossly mismanaged and in need of a major overhaul) believes activists will drive material change at Darden. This would obviously be extremely bullish for shareholders and could happen fairly soon driving shares materially higher.

Three for the Road


Norway, another country that doesn't do 0% rates of return for Savers, sees unemployment drop to 3.5% @KeithMcCullough


"Do what you feel in your heart to be right for you’ll be criticized anyway." - Eleanor Roosevelt


Sporting a "Luck of the Jedi I Have" T-shirt, a California retiree stepped forward to claim a $425 million Powerball jackpot a month and a half after he bought the winning ticket. B. Raymond Buxton was grabbing lunch at a Subway inside a convenience store when he decided to buy a second ticket on Feb. 19. It was that second ticket — a $2 impulse purchase — that hit it big. (CNBC)


A disappointing March could put Q1 regional casino estimates at risk following a nice bounce in the stocks.




Weather adjusted trends have improved since December but March could be a step back.  Q1 estimates look at risk to us and may become evident as the regional states begin releasing March revenues next week.  Even though Q1 estimates came down for BYD, PENN, and PNK, we think more downside remains.  Stocks have bounced nicely off the bottom so be aware.



On February 4th, we called for a regional reversal and turned positive on the regional gaming operators based on better than expected January monthly regional trends and better February results.  Weather impacted January and February results but the 2nd derivative was still positive.  As a result, the regional gaming operators garnered investor attention.  Tax refunds and the promise of realized pent up demand during March pushed the stocks up to a mid-March peak - PENN peaked up 16%, PNK +29% and BYD +45% vs the S&P 500 Index up 8% from our Feb call.


Additionally, after the close of the financial markets March 10, Elliott Management disclosed it owned 5.28 million shares of BYD as well as an economic exposure of approximately 2.05% of the common stock outstanding via derivative agreements.  Since then, Elliott Management and its founder, Paul  Singer, have been tight lipped regarding their intensions and plans – likely driven by the licensing nuances of the gaming industry.


Investors and the sell-side believe earnings, especially 1Q14 EPS, have stabilized.  Since our Feburary 4th pivot call, regional gaming stocks have outperformed, led by BYD +32%.  While the regional gaming stocks have retreated modestly since mid-March, downside remains, especially if the March regional revenues come in soft and disappointing as we expect.  We believe 1Q14 and FY2014 earnings could be subject to further negative revisions.   



As seen below, our early regional forecasting algorithm predicts March regional gaming revenues will decline 7%, as sequential deceleration from weather impacted results from February.   





Two large regional states are tracking below what we believe is consensus thinking for March.  With only one day left in the reported month, Missouri SSS GGR looks like it will close March down 7-8% and Pennsylvania SSS slots falling 5-7% YoY.  Remember that February fell 7% in Missouri and 8% in Pennsylvania - so not much improvement sequentially despite awful weather in February.  Moreover, expectations may be for flat or even better regional GGR YoY given higher tax refunds and pent-up, weather related demand carryover from February.  Neither our model nor the early evidence suggests March regional GGR is close to flat.



Bad demographics should continue to pressure regional gaming revenues.  Younger generations are simply not interested in slot machines.  We’ve written extensively about this secular headwind so we won’t rehash here.  However, these volatile stocks can move significantly on data points – especially negative, reversal or contra-psychology inflections.