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Short FL/HIBB: Black Books Next Thursday (1/22) & Monday (1/26)

Takeaway: We’re releasing 2 Black Books – Deep Dive on FL and HIBB. Our Athletic Book focused on the Industry/Theme. This dives into the short ideas.

We’re going to release two Black Books over the next two weeks. One on Foot Locker next Thursday, January 22nd at 11:00 am ET. And the other on Hibbett on Monday, January 26th at 1:00 pm ET.  Dial-in info is below.  Since we launched our 90-page Athletic Black book in late December, our Short Call on Foot Locker has been something of a lightning rod, accounting for a disproportionate amount of our call volume. Since then, we’ve seen several Sell-Side downgrades on FL, the latest because of a ‘Slowdown in Basketball’, which we think misses the mark and understates the downside in this financial model in the intermediate-term and long-term. Simply put, the ‘newly bearish’ out there are simply not bearish enough. Conversely, people are not as focused as they should be on HIBB, which has major downside in the model.


Unlike in our Athletic Black Book, where we had just a few slides on each company, we’ll be doing a thorough deep dive into every line item and business driver for FL and HIBB.  


Note that this is a time we previously reserved for our e-commerce Black Book. That’s still on the way – and you should expect it in February. But we think that given the changing focus of the market, and the controversy around FL and HIBB warrant immediate attention.


Here’s Just a Few of the Topics We’ll Hit On For  FL/HIBB


1) Store footprint potential vs what we see today.

  • FL cannibalization analysis by region and by mall, and why it’s biggest competitor is actually itself.
  • HIBB overlap analysis with Dick’s, Academy, and Sports Authority – how much quality growth is left?

 2) Productivity

  • Opportunity to take productivity higher via mix, with all else equal.
  • Trends in pricing vs mix, and why it leaves little upside in the model from here.
  • Productivity and profitability if ‘Nike ratio’ shrinks – either by design or by misfortune.
  • Impact of category (basketball, running, etc…) trends on productivity.

 3) e-commerce.  One of our key points is that store sales (barring 6% industry growth) will never grow again. In that regard…

  •  What is each company’s installed investment base to facilitate e-commerce growth going forward.
  • How do consumers use the retail site as opposed to going to the Brand directly.
  • What are ‘free shipping’ trends in the Athletic space, and what are the ensuing margin implications for each company.
  • Which retailers have the greatest risk as Nike goes more direct? When and where should we see it?
  • We’ll quantify the AMZN risk for each retailer.

4) Ken Hicks was a bigger force inside FL than the market is recognizing. But FL is not in trouble because he left, he left because FL is in trouble.


5) What SG&A levers can both companies pull if the gross profit algorithm rolls


FL Call Info (Thursday 1/22, 11:00 am ET)

  • Toll Free Number:
  • Toll Number:
  • Conference ID/Password: 13598538
  • Materials: CLICK HERE

HIBB Call Info (Monday 1/26, 1:00 pm ET)

  • ***Call details to follow

McCullough: This Is The Uber-Bull Case For Gold


In this excerpt from today's Morning Macro Call, Hedgeye CEO Keith McCullough responds to a viewer's question about recent moves in gold and outlines what he believes could make the "uber-bull" setup for gold moving forward.

Keith's Macro Notebook 1/14: Japan | Commodities | Financials


Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


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.

Hedgeye's Morning Macro Call Replay: Is JPM Set Up Worse Now Than 2011?


On a special extended edition of the Morning Macro Call, Hedgeye CEO Keith McCullough gives his global macro rundown, welcomes in Financials Sector Head Josh Steiner to talk JP Morgan after they missed earnings, and announces Hedgeye's Market Marathon, an all-day live streaming event that will air on January 27. 


To sign up for the Market Marathon, visit live.hedgeye.com/market-marathon


Retail Callouts (1/14): AdiBok Endorsements, UA, JCP Properties, RH, AMZN

Takeaway: AdiBok-unlikely to execute endorsement plan, but if it does it hurts UA. Dept. Store closures-JCPs two options.



AdiBok, UA, NKE - Adidas to Sign Up to 500 Athletes for Endorsements



"The company’s U.S. arm has the go-ahead to sign as many as 250 National Football League players and 250 Major League Baseball players over the next three years, up from a total of fewer than 40 now."


Takeaway: When a once-relevant brand duo (Adidas and Reebok) plans to buy its way into the US sports endorsement arena, it is bad news for everyone. Maybe we'd be ok with that if the company had the product to back it up. But it doesn't.  Apparently in Herzogenaurach, the order of operation is a) spend, b) sell, c) create great product.

We're especially surprised in that AdiBok is getting so aggressive with its endorsement spending after it just signed a $1.3bn (US) deal ($130mm/10 years) for Manchester United -- which is almost triple the price Nike was previously paying. This number accounts for about 5% of Adi SG&A.

In reality, we don't actually think that AdiBok will get to a point where it can execute on this aggressive plan in the US, as it ranks in the top 10 global retailers/brands that need a complete management overhaul. We think that's more likely than not in 2015.

But if it does not happen, and AdiBok continues with its plan to up the ante in the endorsement game, it severely crimps Under Armour -- which has started to sign larger athletes and now appears to have some severe competition (note that Notre Dame, a perennial Adidas school, switched to UA last year).


JCP - Landlords eager to reclaim JCPenney stores



Takeaway: The announced store closures by M and JCP are nice, but the reality is that half of that will come back as capacity selling apparel. We need to see another 90mm square feet, or 950 stores, go away -- and never come back. Our work shows that JCP needs to close 300 stores. And we think the company can take 2 different paths to achieve this end goal.

1) In the report we put together in May we identified a fleet of stores (300) that matched the demographic profile of the announced closures from January '14. In summary the annual household income within a 15 minute driving radius was about 20% below the company average.  By eliminating the bottom of the barrel demographic our math shows that the demographic profile would rise 7% and productivity would increase 20% for JCP's remaining 700 store portfolio.  At first glance it appears that the 40 closures this year are in this bucket. So, JCP can continue cull its bottom tier stores locked in less than optimal properties, or…

2)  The company could play offense and monetize its 134 'A' Mall locations. The economics are such that landlords could take an existing JCP property. Chop it up into a RH, Whole Foods, and Cheesecake factory and take rental income from the Anchors up 100+% (see image below).  Which would still allow for good returns after factoring in the redevelopment costs.

Retail Callouts (1/14): AdiBok Endorsements, UA, JCP Properties, RH, AMZN - 1 14 chart1





US December Retail Sales

Retail Callouts (1/14): AdiBok Endorsements, UA, JCP Properties, RH, AMZN - 1 14 chart2





AMZN - Amazon to take over textbook sales at UMass Amherst



Obama Pushes for Greater Cybersecurity



Online grocery delivery startup Instacart gets $220 million infusion



RSH - RadioShack offered $500 million loan from Salus Capital



Game Digital slumps 40% after profit warning



RAD - Rite Aid Completes Amendment and Extension of Existing Credit Facility



Takeaway: Neither you nor your clients can afford to miss what we have to say about the yen, the Nikkei and the SPX in today's Macro Playbook.


Long Ideas/Overweight Recommendations

  1. Consumer Staples Select Sector SPDR Fund (XLP)
  2. Health Care Select Sector SPDR Fund (XLV)
  3. iShares U.S. Home Construction ETF (ITB)
  4. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  5. iShares 20+ Year Treasury Bond ETF (TLT)
  1. LONG BENCH: Vanguard REIT ETF (VNQ), Utilities Select Sector SPDR Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV)

Short Ideas/Underweight Recommendations

  1. iShares TIPS Bond ETF (TIP)
  2. CurrencyShares Japanese Yen Trust (FXY)
  3. iShares MSCI Emerging Markets ETF (EEM)
  4. SPDR Barclays High Yield Bond ETF (JNK)
  5. Industrial Select Sector SPDR Fund (XLI)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)



Japan Consternation Continues: Today’s moves in global macro make us incrementally wrong on Japan. Specifically, the yen’s +1.3% rally vs. the USD helped perpetrate a -1.7% decline in Japan’s benchmark equity index, the Nikkei 225. Since we authored the thesis back on 12/16, the FXY has is more-or-less flat (down -13bps); that lack of currency debasement has contributed to a -881bps decline in the DXJ over that time frame.




The JPY rallied from a close of 117.93 yesterday to and is now trading around ~116.50 on today’s weak U.S. retail sales report – testing a key Fibonacci retracement level.



Source: Bloomberg L.P.


Our intermediate-term TREND line of support is 114.26; while a continued pullback in the cross would undoubtedly bring us more pain on the long side of Japanese equities, we are content to maintain conviction in our thesis that the Japanese yen is likely to trade materially lower vs. U.S. dollar over the intermediate-to-long term to the extent that support level holds.




Holding that level would likely present investors with a opportunity to “back the truck up” on the long side of the Nikkei, which is already nearing TREND support on our quantitative factoring.




So why are the dollar-yen rate and Japanese stocks correcting? The simple answer is repatriation.


During “risk off” periods, the USD/JPY tends to hold a strong inverse correlation with cross-asset volatility due to the country’s status as the world’s largest supplier of capital as Japan domiciled investors have historically sought higher returns offshore than those available in domestic markets. Japan’s net international investment surplus of ~$3T is equivalent to 68% of the country’s GDP and compares to a -$5.5T deficit for the U.S. (somewhat a function of its reserve currency status).


The more nuanced answer is a function of monetary policy expectations.


Specifically, “sources” are out this morning claiming that the BoJ is considering cutting its FY15 target for core CPI (which includes energy prices) and “isn’t inclined to expand QQE at the current juncture”.


While the former might be true, we remain resoundingly on the other side of the latter conclusion. Specifically, we think any cut to the BoJ’s inflation forecast will effectively force them to do more to archive their politicized “5% Monetary Math” target; the BoJ is failing miserably at its politicized objective at the current juncture.






Qualitatively speaking, continued consolidation in the dollar-yen cross to our intermediate-term TREND support level would effectively wash out the weak  hands in the Abenomics trade.


Looking to our Tactical Asset Class Rotation Model (TACRM), we see that the FXY has a Volatility-Adjusted Multi-Duration Momentum Indicator reading of +0.1x, which implies the preponderance of market participants are observing no clear direction of volume-weighted average price momentum.


A continued break out in the yen would likely register a “BUY” signal on this metric and that would likely coincide with a material ramp higher in the VIX and a lower-low in the SPY relative to its early-JAN and mid-DEC lows.




Is the #bubble in U.S. equities over? If you ask the high-yield credit market, in which TAIL risk is officially on, the answer is clearly “yes”. If you ask us, we’d say “TBD”, but, as we have been highlighting for the past 3-6 months, the risk factors are definitely there for anyone who dares to do the work…




***CLICK HERE to download the full TACRM presentation.***



Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.


The Hedgeye Macro Playbook (1/12)


#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.


Early Look: Creatively #Patient (1/14)


Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014.  2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.


Mortgage Apps | Seasonal Wheel-Spinning (1/7)


Best of luck out there,




Darius Dale

Associate: Macro Team


About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.          

Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.