Keith's Daily Trading Ranges [Unlocked]

This is a complimentary look at Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers every weekday morning by CEO Keith McCullough. It was originally published March 20, 2015 at 07:28 in Daily Trading RangesClick here to learn more and subscribe.

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NKE – The Math Nobody Is Doing

Takeaway: NKE’s superior relative guide is driven by one major factor – e-commerce. $1bn+ at 70% GM = over half of incremental GP and 6% EPS growth.

Nike’s EPS beat as well as its initial below-consensus guidance for FY16 were not a surprise.  What is a surprise is the composition of the earnings algorithm – and that's the part of the discussion that will be missing this morning. So here’s our two cents. Consider the following…Nike, Ralph Lauren, and VF Corp all guided to about a 500bp hit to top line growth over the next year due to FX. But that contributes to down double digit EPS at RL and +4% EPS at VFC, but double digit growth in earnings at Nike. Despite the biggest FX hit Nike has felt in over five years, the company basically plans to leverage its top line growth rate into earnings by a factor of 2 (+msd sales into +dd eps). And let’s not forget that this is Nike we’re talking about -- it rarely gives initial guidance that it does not ultimately beat (usually by a wide margin). We’re definitely not averse to owning Nike as it sits on our Long Bench, but we’re concerned about valuation and such little room for error at the precise time the most important person in the company is retiring.


NKE – The Math Nobody Is Doing - NKE fx guidance 3


We chalk it up to two factors… a) the impact of e-commerce on the model, and b) how well this company (notably Don Blair) manages the financial model.


A)     Consider e-commerce for a minute.

  1. E-commerce was up 42% in the quarter, which is a sequential slowdown from 2Q’s 66%. But looked at on a 2-year run rate, underlying growth remains at peak levels. We think that Nike has plans to set new peak levels in FY16. How we’re doing the math, e-commerce represents about 6% of Nike’s sales. That’s about $1.8bn today. We think the company will add between $1bn-$1.2bn in FY16, or 55%-65% growth. Nike will probably tell you that we’re too aggressive. But let’s put the accountability pants on. In Oct 2013, the company said that e-comm would go from $540mm in 2013 to $2bn in FY17. It appears to be hitting that goal 1-2 years ahead of plan. It didn’t purposely sandbag, but rather it’s such a dynamic growth opportunity with more and more growth opportunity by the day.
  2. The margin on those sales is a big consideration. How we do the math, e-commerce sales are about 20points margin accretive. That’s outlined in the following table. But more important than the actual gross margin rate is the magnified amount of gross margin dollars as Nike captures a full retail price instead of one with a 50% wholesale discount. A 20%+ margin on a 2x price = nearly 4x the gross margin dollars.
    NKE – The Math Nobody Is Doing - NKE margin math
  3. Yes there are increased working capital requirements, which Nike will have to manage. There will be a learning curve there. But outright capital spending and incremental SG&A investment on e-commerce is shrinking – for now at least – given what Nike has been investing (much of it quietly) over the past three years.
  4. We could actually make the argument that 100% of the e-commerce spend will be incremental – as in, not take away from its wholesale business (FL, FINL, HIBB). Not over the long term, but temporarily. The point is that Nike is going to manage its wholesale model with kid gloves. It will say and do all the right things, as will its partners. But make no mistake, it will aggressively push the envelope with its e-comm model along the way. It will only know it pushed too far when some serious channel stuffing is apparent in the wholesale channel (ie. higher inventories, lower comps at FL, or maybe even 24% growth in a sub-par outlet like KSS in the last qtr).  And at that point, the right decision will likely be to still grow e-comm aggressively.
  5. In the end, we think that e-commerce growth will account for $750mm-$900mm in incremental gross profit – or about 60% of gross profit growth.  That also translates to 5-7% in EPS growth. Back to the comparison to other companies above, we think this largely explains away why Nike is growing earnings 2x the rate of sales while other non-durables brands are flat to down.  


B)      The financial model, and the Don Blair factor, are far simpler. The cross currents impacting Nike’s financials are nothing short of fierce. But the consolidated numbers always manage to balance out and produce consistent results. This is all Blair. We’re not saying that he micromanages daily regional P&Ls, but rather, he has a process for managing the financials such that when one region or business line is challenged, another will always pick up the slack. He built a finance organization from the ground up, and to his credit, has set in motion a process that is bigger than any one individual. That said, things will change when he leaves – perhaps not in the finance organization at all, but in other parts of the company where people ‘behaved’ in a shareholder-friendly way simply knowing that Blair is there.  See our write up on that below. 



Previous Note on CFO Retirement from 2/12/15


02/12/15 05:39 PM EST

NKE - CFO Retirement = Negative Development


Takeaway: This is a bad event. The business is absolutely fine – no issues there. But Blair is as good as they come. Stay away for now.


There’s no sugar-coating this announcement from Nike that CFO Don Blair is retiring. We’ve always said that there’s only one person we’d be worried about leaving Nike, and that is Don.  The reason is that aside from having tremendous credibility with the investment community, Don has served as a critical bridge for Mark Parker (CEO) into the world of cost management, capital deployment, and ROIC – which is key for a CEO who is otherwise (brilliantly) focused on brand, design, and the consumer.  


To be clear, we’re pretty certain that this is not a sign of an impending blow up. Business at Nike is fine, and he is leaving while he’s on top. In fact, to his credit, Don would absolutely not leave if the company was trending in the wrong direction – and he’ll be there until October 31 of this year. Anyone looking for a blowup during that time period will be disappointed.


Andy Campion is perfectly appropriate as a CFO for Nike, Inc. – but as much as people will argue that serving as CFO of the Nike Brand prepared him for this job, we’d say that there is a massive difference between being the CFO of a subsidiary (albeit a huge one) and being the outward-facing CFO of a company that's in the top 10% of the S&P 500. Even Don Blair had an extremely painful initial 2-3 years while he navigated through the confusing internal forecasting process inside Nike. The fact is that Don is one of the best CFOs that I (McGough) have known in 22 years.


The learning curve for his successor will be steep. And keep in mind that Don fought hard (and won) serious clout for the Finance organization in a company that is traditionally Brand and Marketing-driven. With Don no longer as the anchor, we think we’re likely to see more political tussles internally – potentially for a few years – while the new regime is established.


We’re taking Nike from our Long list to our ‘Bench’ until we get more comfort in organizational structure. If we were looking at an 18 multiple, we’d hang in there. But at 23x, we’d rather wait. 


LEISURE LETTER (03/20/2015)



  • March 26: Macau Legend 4Q CC


WYNN - raised the pay of employees previously paid MOP 65,000 a month or less by 5%. This represents 98% of its current 81,00 workforce. "This increase is in addition to the 1,000 shares we granted to each of our employees, which now totals 8.3 million shares given since July 2014. These shares, including their annual dividends, represent an additional 10% increase in pay,’ said CEO Steve Wynn.

Takeaway: WYNN following what other operators (except Galaxy) have already declared.


GENTING - More staycation bookings for SG50 long weekend (Aug 7th). This is encouraging, they said, as such inquiries and bookings usually occur two to four weeks before a long weekend.  


The Ritz-Carlton, Millenia Singapore, bookings made for the National Day weekend were more than double those made at the same time last year - mostly due to local demand. Orchard Hotel Singapore is 25% booked for the long weekend, with half of them being staycations. 


Inquiries for staycations at Resorts World Sentosa have grown by 10%. 


Takeaway:  RWS outperformed on REVPAR vs its upscale peers in Q4. It could continue.


Lightstone/Moxy - Lightstone in February had announced plans to invest $2 billion in the development of hotels in the United States. Half that total will be used to help jump-start MAR's Moxy brand, which has one open property in Milan. 


Lightstone President and COO Mitchell Hochberg said the mix of new builds and conversions would take place during the next 24 months. In addition to Moxy, Lightstone officials will look to develop other select-service hotels. 


“We believe we are in the fourth or fifth inning of a nine-inning game,” he said of the industry cycle. 


NCLH - laid off an unspecified number of employees Thursday, confirming rumors that circulated widely during the industry's annual Cruise Shipping Miami conference this week.


Several sources estimated the number at 200 or more affected workers and said the layoffs may take place over time, although it was not clear how long that period would be. It was also unclear how many workers were immediately laid off on Thursday.


Takeaway:  Cost synergies is just a nice way to say layoffs


CCL/MSC (update) - A total of 17 cruise passengers were among the 20 people killed in the Tunis terrorist attack, according to Costa Cruises and MSC Cruises. A further 21 passengers were injured. All Tunisia calls from Costa/MSC have been canceled for the year.



CCL - AIDA Cruises will have 35% of its 2015 capacity in the Mediterranean this year, according to the 2015-2016 Cruise Industry News Annual Report. This is a major change for the leading German cruise line as prior years saw Northern Europe dominate AIDA’s fleet deployment data.


While Mediterranean capacity has grown, AIDA has slowly cut back in Northern Europe, cutting back nearly 18% from 2014 to 2015. The line has also added capacity and offerings in the Caribbean, where it will carry over 70,000 passengers this year, as opposed to 50,000 in 2014.


AIDA is making moves in Asia as well, as the line will double its Asia capacity this year, growing by nearly 100% to carry over 20,000 passengers in the region.

Takeaway:  AIDA's diversifying from its German hub. Good thing since additional supply from TUI is pressuring pricing there.



RCL - a rumor that SkySea be adding a second ship to start operation as soon as April of 2016. The Ctrip and Royal Caribbean joint venture has been busy building up its sales channels through Ctrip and other retailers and news could come soon. 





IVS capacity report - Chief Executive Fernando Chui Sai On has announced that the tourism capacity report, conducted by the Secretary for Security, Wong Sio Chak, and the Secretary for Social Affairs and Culture, Alexis Tam Chon Weng, has been completed and will be submitted to the central government with regard to improving the city’s Individual Visit Scheme (IVS) for Mainland tourists.


Secretary Wong told local broadcaster TDM Radio yesterday that the capacity report covers studies on the measures applied for crowd control and border crossing in the past few years, especially during the Chinese New Year. In addition, he said that the underlying concerns and risks for the measures were also evaluated.

The CE, meanwhile, said that the central government would study how to adjust and improve the current IVS policy based on the report, aiming to reach a balance between the capacity and life quality of Macau residents.

Takeaway: The IVS report is done. The govt is quiet on the details.


Construction death - Three fatalities this month alone. Most recently yesterday, on the Hollywood Roosvelt Hotel construction site in Taipa.


Takeaway: So far, these incidents haven't affected the timeline of the upcoming Cotai projects.


HK - With cross-border tensions exacerbated by pro-democracy Hong Kong protests, tour groups visiting Hong Kong from China plunged about 80% in early March. A Beijing crackdown on conspicuous spending by mainlanders also shows no signs of letting up, sending tourists further afield.


While daytrippers from just outside Hong Kong continue to buy daily essentials there, Chinese travelers with cash to burn are homing in on places like South Korea and Japan. According to the Japan National Tourism Organization, Chinese visitors lured by the weaker yen and easier visa rules nearly tripled in February to a monthly record: With one in four tourists in Japan, Chinese became the biggest visitor group in a country with which relations have often been fraught.


Takeaway: Japan and S Korea have seen an influx of Chinese visitors.


Turkish Lottery - The group that won the license to run Turkey’s national lottery is seeking $2 billion from lenders including Deutsche Bank AG, Akbank and Denizbank to help pay for the bid, people with knowledge of the matter said.

The lottery operator, set up by Istanbul-based companies Net Holding AS and Hitay Investment Holding AS, plans to borrow the funds for eight or nine years and is close to gaining commitments from banks.



US REVPAR - February REVPAR growth was 8% YoY. Week ending March 14, REVPAR was up 3.8% YoY.

Takeaway: US REVPAR averaged an impressive 8.3% YoY growth in Jan-Feb, although March growth will be much slower. 


Hedgeye Macro Team remains negative Europe, their bottom-up, qualitative analysis (Growth/Inflation/Policy framework) indicates that the Eurozone is setting up to enter the ugly Quad4 in Q4 (equating to growth decelerates and inflation decelerates) = Europe Slowing.

Takeaway:  European pricing has been a tailwind for CCL and RCL but a negative pivot here looks increasingly likely in 2015.

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Eurozone: Buy Buy Buy?

This note was originally published at 8am on March 06, 2015 for Hedgeye subscribers.

“One Look Is Worth A Thousand Words”

-Fred R. Barnard


While he later changed “one look” to “one picture”, the ad man Fred Barnard is attributed with the modern day adage, which he first used in the advertising trade journal Printers’ Ink on December 8, 1921 to promote the use of images in advertisements that appear on the sides of streetcars.  


A year ago Hedgeye hired Bob Rich as our in-house cartoonist and illustrator. Formerly a staff illustrator for The Republican newspaper in Springfield, Massachusetts and an editorial cartoonist for The New Haven Register, Bob has won numerous awards for his work.  To say the very least, he has flourished in his role at Hedgeye.  His creative and skillful ability to depict in a cartoon what we analysts spend hours trying to put into words is enviable. And through a recent desk reshuffle in the office, I also have the pleasure of sitting next to Bob, which selfishly affords me the opportunity to encourage him to do European related cartoons, my area of coverage on the macro team.


Back to the Global Macro Grind


With news of record inflows by investors into European securities; the EUR/USD at a 11 year low; and confirmation that ECB President Mario Draghi will once again do “whatever it takes” to expand the ECB’s balance sheet, to shore up risk (including Greece) and to maintain the existing Eurozone fabric, do you go all in on Europe?  


Bob’s cartoons below tell it all – for us the mismatch between the Eurozone’s economic fundamentals and its financial markets still remains stark. And the rub between betting all in on Eurozone securities based on Draghi’s QE program versus the threat of blindly following him over the proverbial QE cliff, is THE risk management question. 

Eurozone: Buy Buy Buy? - 1. BRICH


With no crystal ball in sight, here are Hedgeye’s key Eurozone take-aways as we size up going all in on Europe:

  • Our highest conviction investment signal is to stay short the EUR/USD
  • Our Eurozone GIP (Growth/Inflation/Policy) predictive model shows a steady move from QUAD 1 to QUAD 4 to QUAD 3 over the next three quarters. This negative economic view should force the ECB to keep its foot on the QE funnel for longer than its original target [SEPT 2016] as growth surprises on the downside (see our Chart of the Day below), all of which should pressure the EUR/USD lower.
  • We expect that Fiscal Consolidation and Structural Reforms across the region over the intermediate to longer term are unlikely to be carried out (or at the very least not within the ECB’s timeline) to promote economic productivity and job creation, further muting inflation and growth targets.
  • And we expect a confluence of factors to support a strong USD, including 1). policy expectations surround when the Fed will hike rates, not IF, and 2). supportive commodity and business cycle dynamics (for more see my colleague Ben Ryan’s recent note)
  • Our quantitative models show that the EUR/USD is broken  across all durations (TRADE, TREND, and TAIL). We call this a bearish formation and do not see any long term TAIL support until $0.80.
  • On Equities… Juiced By the Draghi QE Drugs:  As risk managers we cannot turn a blind eye to the power of QE to propel equities higher, however we don’t have to be holding the proverbial bag on the way down either. We continue to recommend strong balance sheets at the country level, like Germany (etf EWG), and will tactically trade around QE’s influence on the peripheral markets . YTD we’ve already seen some monster moves across equity markets with the German DAX and Italian FTSE MIB indices each up over +17%.
  • On Fixed IncomeLow Yields Can Go Lower: In yesterday’s ECB press conference Draghi indicated a willingness to buy even government bonds with negative yields as low as the current deposit rate (-0.2%). This flexibility from the Bank, shows once again a commitment to “support” the Eurozone project at all costs. Further, his appetite to support the periphery specifically appears enormous.  Again in his statements he suggested that so long as Greece can pass its reform review, the ECB will reinstate the waver on the conditionality that it will only buy investment grade paper.  Yamas!


This coming Monday the ECB will commence its sovereign bond purchase program (€60 Billion/month of its ear-marked €1.1 Trillion package). While it’s tempting to point to the Fed’s QE impact to juice stocks higher, as risk managers we do not think it’s prudent to simply draw a 1-factor like-for-like comparison. This time may in fact be different.


As outlined, our highest conviction investment signal is to remain short the EUR/USD. That said, we’ll certainly be navigating the macro waters to trade around what influence Mr. Draghi’s QE wand has on European securities.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.89-2.18%

SPX 2085-2117

DAX 11217-11642

USD 95.07-96.68
EUR/USD 1.09-1.12

Oil (WTI) 48.20-52.04


Have a great weekend!


Matthew Hedrick


Eurozone: Buy Buy Buy? - EUROZONE

Dollar Down Move – Lasted A Day

Client Talking Points


One of the sneaky ways to be long #StrongDollar is being long the Russell 2000 vs the S&P 500 – that’s because the Russell gives you domestic revenues, whereas SPX gets you the wrong kind of foreign currency exposure to the USD. The Russell was up another +0.4% yesterday to an all-time closing high of 1254 (+4.2% year-to-date) vs SPX down -0.5% on the day (+1.5% year-to-date) #divergences.


The Japanese Nikkei loves that smell of Burning Yens, up another +0.4% overnight to fresh 15 year highs = +12.2% year-to-date as Bank of Japan Governor Haruhiko Kuroda made a bunch of stuff up about his inflation hopes and said he was going to get “innovative with monetary policy” – thanks buddy (in English that means he’ll go from 90 Trillion Yen in money printings to > 100 Trillion).


It was a good week for longer-term investors who get #Deflation and global #GrowthSlowing. The UST 10YR was down -14 basis points on the week to 1.97% this morning, with next support at 1.91% and resistance at 2.05% - lower for longer remains our call on rates.

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Manitowoc  (MTW) is splitting the business into two companies. Given the valuation differential between the sum-of-the-parts and the current enterprise value of the company, the break-up should be a substantial positive. The low-end of our sum of the parts valuation is $26, and the low-end is not based on a MIDD comp (not that there is anything wrong with a MIDD comp).  In theory, spin-offs and break-ups unlock shareholder value while increasing operating potential of the formerly smothered units. 


iShares U.S. Home Construction ETF (ITB) is a great way to play our long housing call, U.S. #HousingAccelerating remains 1 of the Top 3 Global Macro Themes in the Hedgeye Institutional Themes deck right now. Not only did U.S. home prices accelerate (in rate of change terms) in the Core Logic data this week to +5.7%, but the supply/demand data has been improving throughout the last 3 months.


Low-volatility Long Bonds (TLT) have plenty of room to run. Late-Cycle Economic Indicators are still deteriorating on a TRENDING Basis (Manufacturing, CapEX, inflation) while consumption driven numbers have improved. Inflation readings for January are #SLOWING. We saw deceleration in CPI year-over-year at +0.8% vs. +1.3% prior and month-over-month at -0.4% vs. -0.3% prior. Growth is still #SLOWING with Real GDP growth decelerating at -20 basis points to +2.5% year-over-year for Q4 2014.The GDP deflator decelerated -40 basis points to +1.2% year-over-year.

Three for the Road


VIDEO (1min) Trade the Market Using Math, Not Magic



It's not necessarily the amount of time you spend at practice that counts; it's what you put into the practice.

-Eric Lindros     


In 2014 the average price of brisket increased 47% from 2013, this year it is up 14%.

CHART OF THE DAY: How Are Those "Talks" Going In Europe? (Greek Equities - ASE Index)

CHART OF THE DAY: How Are Those "Talks" Going In Europe? (Greek Equities - ASE Index) - 03.20.15 chart


Editor's Note: This is a brief excerpt from today's Morning Newsletter written by Hedgeye CEO Keith McCullough. Click here to subscribe. 


Oh, then Draghi woke up and gave the Greek guys a buzz telling them to just float it out there that they are “feeling confident” about their talks with the Germans:


  1. After hitting fresh YTD lows (see Chart of The Day), Greek stocks bounced +3% on that and…     

Daily Trading Ranges

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