CHART OF THE DAY: The Canadian Loonie Tracks Oil

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye Director of Research Daryl Jones. Click here to learn more.


"... Unfortunately for many Canadians, the Chart of the Day shows the real driver of the Canadian economy. In this chart, we look at the relationship between the Loonie and Oil. As shown, historically the relationship between the two is very tight, but this relationship has only tightened and now has a correlation of about 0.94. So as oil goes, so too goes the Canadian economy, despite what politicians might tell you."


CHART OF THE DAY: The Canadian Loonie Tracks Oil - 12.23.15 EL chart

The Journey

“We shall not cease from exploration, and the end of all our exploring will be to arrive where we started and know the place for the first time.”

-T.S. Eliot, The Journey


In building Hedgeye over the past 8 years, we’ve struggled with many questions as a leadership team.  Some questions we’ve gotten to the right answers quickly.  While others, we’ve made the wrong decision and then had to re-chart our course years after going down the wrong path.  Perhaps the most ongoing critical question for us, and all companies and teams, is how best to motivate our players.


The most obvious answer to many in the finance industry is that money is the key motivator for people.  Certainly, the hedge fund industry with its 2% and 20% compensation structure underscores this point. And on some level, money provides security and opportunity, but does money motivate and drive outperformance?


Behavioral economist Dan Ariely has looked at this topic exhaustively and based on a number of studies has concluded that there are at least three motivators beyond money that drive satisfaction at work, these are:

  1. Meaningfulness of work - When the work has some greater meaning or impact, it is much more meaningful and motivational to the employee.  To the outside, the idea that a company is trying to "change the world" may seem a bit silly. However to those on the inside doing the work, it is anything but, as it’s important for them to see that their work leads to positive outcomes.
  2. Acknowledgement by others - This is an obvious, albeit sometimes forgotten point, but employees and teammates want to be acknowledged for their efforts.  At Hedgeye we do this in a few different ways, including, no surprise, awarding three people with the annual Hedgeye puck award.
  3. The amount of effort put in - In essence, the harder a job is and the more time and energy required for a successful outcome, the more rewarding people find the job. In essence, there is great motivation in accomplishing the really big and complicated tasks.

So, while compensation certainly has its role, especially in acknowledging a meritocracy in the workplace, there are other motivators that are just as important. Personally, I find the last one the most motivating, which is the joy of The Journey.


Back to the Global Macro Grind ...


Speaking of journeys, I had an epic one over the last couple of days as I brought my 18 month old daughter home to Canada. Though I'm not sure my solo journey with a toddler across the country was nearly as epic as the political journey that currently engulfs various regions across the world.


In Canada, this journey is probably most evident.  It started in the oil and natural gas laden province of Alberta when on May 5th of this year, the National Democratic Party (NDP) won the provincial election. Prior to this election, the Conservatives had won every election since 1971, or had held power for almost 50 straight years.


The Journey - trudeau


On the national level in Canada, the big sea change was with the election of the former drama teacher Justin Trudeau as Prime Minister as his liberal party swept to power on a Keynesian and populist platform.  Both this national election and the Alberta election were reactions to a weak economy and governments that had been in power for a long time and were seemingly doing nothing for the "common man."


Unfortunately for many Canadians, the Chart of the Day shows the real driver of the Canadian economy.  In this chart, we look at the relationship between the Loonie and Oil.  As shown, historically the relationship between the two is very tight, but this relationship has only tightened and now has a correlation of about 0.94. So as oil goes, so too goes the Canadian economy, despite what politicians might tell you.


In the U.S, the political journey can be summarized by one somewhat astonishing word: Trump. Despite the view of many pundits over the course of the year, Trump's stardom has not faded but rather gotten stronger over the course of his campaign.  Currently on a national level, Trump is polling at about 36% in poll aggregates versus the field.


Not only is Trump polling near his personal highs, but he also leads the candidate in second place, which is currently Senator Ted Cruz, by a spread of almost 17 points, which is his highest margin over second place. Most pundits and Republican insiders point to State level polls to emphasize Trump's weakness and on some level this is true, as the race appears much tighter in early nominating state polls. In certain states, such as Iowa, Trump is also trailing by a reasonable margin.


But make no mistake about it, Trump is only getting stronger and is emblematic of a sea change occurring in both American and really global politics, which is the search for an option that does not represent the politics of old. This point is probably most evidenced by the approval of Congress polls, which currently show, based on poll aggregates, that roughly 14% of respondents approve of Congress and 75% disapprove. That is just sad.


In Europe, the direction is less clear and more volatile. The recent election in Spain was inconclusive at best.  Acting Prime Minister Rajoy is slated to meet with Socialist leader Sanchez, but many followers of Sanchez have already indicated they would absolutely not support a Rajoy led government. 


Meanwhile in Portugal, the leftist alliance is showing its first cracks as the Communist Party (yes, Communism is alive and well!), said it would not support a budget that had bank bailout monies.   Finally, the Italians are in the midst of passing a tax cutting budget that appears to put them on war path with the EU over violating EU fiscal targets.


So as stock market operators, what does all this mean for us? Well, simply put, as governments change quicker with more frequent elections and adopt more extremes policies backed by more non-traditional candidates, it will become increasingly important in years ahead to have a handle on the direction of government policy.  On this front, we will have some very exciting news for you in early 2016 as it relates to a meaningful product expansion at Hedgeye. Stay tuned.


Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND signals in brackets):


UST 10yr Yield 2.12-2.32%


VIX 15.53-24.72

USD 97.07-99.47

Oil (WTI) 35.04-37.07


Keep your head up and stick on the ice,


Daryl G. Jones

Director of Research


The Journey - 12.23.15 EL chart

Fun in the Sun for U.S. Stocks

Client Talking Points


Oil led the bounce in U.S. equities yesterday – we can no longer count how many of these counter-TREND head-fakes we’ve had in the last 18 months but the immediate-term risk range still implies lower-for-longer at $35.04-37.07 WTI.


Yep. You got the recessionary industrial production print of down -1.2% year-over-year for NOV last week and you’ll get another recessionary Durable Goods print this morning – we signaled to short industrials (XLI) and CAT and WAB again on green yesterday.


The UST 10YR Yield bounced to 2.25% with U.S. stocks having their 13th up day in the last 33, so we’re gearing up to make a big asset allocation move back to my max in the Long Bond (TLT) anywhere north of 2.30%.


*Tune into The Macro Show with Hedgeye CEO Keith McCullough and Restaurants & Consumer Staples analyst Shayne Laidlaw live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Federated Investors (FII) profitability got a boost last week as the Fed boosted short term rates for the first time in 7 years. Even the slight 25 basis point hike improves profitability in the firm’s leading money fund business by +30% into the New Year.


In essence, the firm rolls 30-day paper throughout the short term fixed income curves and the new higher yields forthcoming into 2016 will allow the company to claw back some of the waived fees it has extended to its client base in money funds. Year-to-date the company has waived over $300 million in fees. With that firmly in the rearview, it becomes an opportunity set as FII gets higher yield from cash products next year.


In the financial sector, FII is the most asset sensitive name we cover, meaning it benefits most from even marginal interest rate hikes.


We have to give Restoration Hardware Chairman and CEO Gary Friedman props for his approximately nine minute segment on Cramer last week. Let's face it, him going on what's arguably the most volatile and biased financial media platform, unscripted, is not what we wanted to see. The risk of fireworks was high.


But he capped off a successful day RH (CFO and IR) had on the investor conference circuit by focusing on the real value drivers at Restoration Hardware (RH) -- growth in product concepts, and RH's real estate transformation. The appearance was planned well before the earnings release, by the way, coinciding with a business-focused trip to NYC. All-in, it was a positive event for the stock.


Now that the Fed finally hiked federal funds by 25 basis points into a late-cycle slowdown, the fact that TLT was up 1.8% (Wed-Fri.) on “lift-off” should be concerning to the growth accelerating bulls. After the dovish hike, the U.S. Treasury 10-Year Yield (THE GROWTH EXPECTATION PROXY) was down 10 basis points (2.3% to 2.2%). And yes, the most telegraphed rate hike ever was dovish.


Just look at the Fed’s projections and the language in the FOMC's statement. Yellen, essentially, acknowledged what we have said for ~ a year and a half now:

  • “The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate”
  • “Market-based measures of inflation expectations remain low; some survey-based measures of longer-term inflation expectations have edged down”
  • “Net exports have been soft”
  • ... And on the Fed’s forward-looking economic projections:
  • The Fed kept 2016 GDP estimates unchanged, and downwardly revised 2017 to 2.0-2.3% from 2.0-2.4%.
  • 2016 PCE Inflation was downwardly revised to 1.2-1.5% from 1.5-1.8%. 

Three for the Road


McCullough: The Three Signs of Coming Recession… via @hedgeye



Knowledge speaks, but wisdom listens.

-Jimi Hendrix                   


Today in 1823, The Night Before Christmas was published, anonymously.

the macro show

what smart investors watch to win

Hosted by Hedgeye CEO Keith McCullough at 9:00am ET, this special online broadcast offers smart investors and traders of all stripes the sharpest insights and clearest market analysis available on Wall Street.

The Macro Show Replay | December 23, 2015


December 23, 2015

Hedgeye's Daily Trading Ranges are twenty immediate-term (TRADE) buy and sell levels, with our intermediate-term (TREND) view and the previous day's closing price for each name.  Click HERE for a video from Hedgeye CEO Keith McCullough on how to use these risk ranges.


  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.32 2.12 2.24
S&P 500
1,993 2,052 2,037
Russell 2000
1,109 1,153 1,137
NASDAQ Composite
4,890 5,040 5,001
Nikkei 225 Index
18,507 19,338 18,886
German DAX Composite
10,159 10,823 10,488
Volatility Index
15.35 24.72 16.60
U.S. Dollar Index
97.07 99.47 98.24
1.07 1.10 1.09
Japanese Yen
120.28 121.99 121.08
Light Crude Oil Spot Price
35.04 37.07 36.47
Natural Gas Spot Price
1.69 2.03 1.91
Gold Spot Price
1,049 1,084 1,071
Copper Spot Price
2.02 2.15 2.11
Apple Inc.
103 110 107
641 682 63
Alphabet Inc.
746 778 767
Walt Disney Company, Inc.
103 109 107
Nike Inc.
129 135 131
Micron Technology, Inc.
13.03 15.08 14.61



NKE – Why Is Nobody Talking About This?

Takeaway: Incremental Gross Profit dollars from e-comm are now bigger than wholesale. Nike is officially its own most important customer.

We find it amusing that in the entire 60 minutes of prepped remarks and Q&A, not once did Nike management comment (nor did anyone ask) about the most significant financial milestone we’ve seen out of Nike in the Mark Parker era. Specifically, this marked the first quarter in history where Nike DTC accounted for a greater percentage of growth than its wholesale business. Calculate it any way you want…the results are the same.


  • E-commerce grew 50% in the quarter and accelerated on a 2yr basis by 200bps. It now stands at (just) 5.0% of sales, compared to 3.5% last year.  Those might sound like small numbers, and they are. That’s why this trend has so much room to grow. Nike states a $7bn goal (e-commerce) by 2020. We think it will be closer to $11bn. That’s an incremental $10bn from the $1.2bn it registered last year. This is where the consensus will prove not bullish enough on Nike, and not bearish enough on its wholesalers (FL, et all…)
  • As a percentage of growth, e-commerce accounted for 35% of the incremental dollars in the quarter and DTC (inclusive of Brick and Mortar and e-commerce) made up over $150 of the incremental $300mm in revenue in the quarter. This is the first time we’ve seen that from NKE, ever. And it won’t be the last.  *calculation note: we assumed that DTC growth numbers were exposed to the same FX headwind as the 8% company average.
  • More importantly,  DTC accounted for 60% of the incremental gross profit dollars in the quarter based on our math.


This is the first time EVER that wholesale accounted for less than 50% of incremental profit. This means that Nike itself is now a more important profit driver than all of its traditional customers combined.


NKE – Why Is Nobody Talking About This? - 12 23 2015 Rev


NKE – Why Is Nobody Talking About This? - 12 23 2015 GM


Ultimately, this is what should push Nike’s gross margins past 50% (from 46%), which is where $8-$9 in earnings power becomes part of the discussion. That’s what we think you need to believe to own this stock today.


The Quarter – Golf Clap. But 3Q Should Be Big

For your average company, this was a great quarter. For an industry-leader like Nike that trades at 27x earnings, it was average – at best. Yes, the futures numbers remain explosive (15% global growth, and 14% North America), and the growth in China is mind-numbing (China is 33% of EBIT, and is growing at 30%+). But keep in mind that the key profit driver – Nike DTC – is not included in the futures numbers. The company actually missed revenue (growing only 4%), despite having put up a healthy 9% futures growth number in 1Q. Gross Margins looked great, thanks to e-comm, but the company would have missed the Street’s EPS expectation by $0.02 if tax rate did not help EPS by $0.06ps. Inventories are still high, as Nike put up the worst sales/inventory spread in 14 quarters – that’s a long time (see SIGMA chart below). Call it West Coast port delay overhang, call it an expeditious move on NKE’s part to reinforce the pull model in the US, but the fact remains that NKE is sitting on bloated inventory levels in its core market for the first time in a decade, and that’s not a positive event for the rest of the athletic supply chain web.  The way we see it, Nike was overly conservative in setting 3Q EPS expectations. Nike basically guided top flat EBIT in 3Q, or about $0.90 per share. We think it will do over a buck.


NKE – Why Is Nobody Talking About This? - 12 23 2015 Sigma


Here’s our comments leading into the Quarter.


NKE | Key Issues

Here’s a quick overview as to what we’re looking for from Nike tonight.

  1. A Big EPS Beat: We’re at $0.93 vs the Street at $0.86. This company has not missed a 2Q in well over 10 years. It’s not gonna start now.
  2. Futures. We all know that 9 out of 10 times, the consensus futures estimate is +1/-1 the prior quarter’s 2-year trend. But that only proves to be correct 4 times out of 10. So the question is…are we plus, or minus. Let’s keep in mind that this is an unaudited number that management does not even know until 1-2 weeks before the print. That said, we’re looking for 15% Global C$ growth in Futures, including 10% growth in North America. The latter would represent a 400bp sequential slowdown from 1Q results.
  3. Bifurcation in Futures and Results. One of the key factors behind our long term call on Nike (and our short on FL) is that Nike is likely to build its e-commerce business from $1.2bn last year to $11bn by 2020. That’s nearly 60% ABOVE the e-comm target Nike gave the Street at its analyst meeting earlier this year. This means two things…
  • Futures: At some point, futures will become extremely less relevant, as futures only applies to Nike’s wholesale business. Naturally, we’ll likely hear the company talk about this when there is the inevitable downturn in futures.
  • Gross Margins: Gross margins are likely headed well over 50% vs the 46% it reported last year, as e-commerce margins are about 20 points above wholesale.
  1. E-commerce: We need to see growth this quarter of at least 40%. We’re modeling 50%. It’s going up against a tough comp vs last year (65%), but lets face it…when we’re making a case that e-comm will grow from $1bn to $11bn, going up against a ‘tough comp’ is absolutely irrelevant. Every quarter should be a tough comp, otherwise we’re simply wrong in our thesis.
  2. US Commentary: Here are a few points that matter a lot, both for Nike and for retailers like FL, FINL, DKS, HIBB, etc..
  • Saturation: If we were to ask only one question on the call (we generally don’t ask our questions publicly on conf calls) it would sound something like this, “Over the past six years, Nike has increased its penetration in key wholesale accounts from 40-50%, to 60-80%. At the same time it used the resulting cash flow to invest in the plant, people and systems needed to aggressively grow the leg of distribution – Nike DTC (e-comm) -- that will propel Nike from $30bn in sales to $50bn.  With zero square footage growth opportunities for the traditional retailers in the US, and Nike incrementally taking higher ASP product for its proprietary distribution network, how can the traditional retailers actually grow? We understand the ‘innovation agenda’, and the ‘category offense’, but unless Nike convinces the consumer to break out of a 35-year paradigm of per capita purchasing patterns – it seems like we’re at a point where it’s all about price for the legacy retail models. No?”
  • Basketball: Not hugely relevant to Nike, but relevant to retailers like FL where about 40% of sales are basketball. FL recently said bball sales slowed, despite a 4% increase in the number of Nike launches during its reporting period, and a 7.4% boost in average price point?
  • Inventory Levels: US inventories were elevated at Nike last quarter, and the company noted that it should be cleaned up by the end of Q3 (Feb). We need to see meaningful progress towards this goal, or at least increased confidence that it is being fixed. Reminder, Nike’s confidence in clearing out inventory might be bullish for Nike, but not necessarily the wholesale channel.

On-site Manufacturing: Nike has kept this out of the forefront of the discussion for two years now. But it’s going to be a very relevant, very soon. Aside from driving the DTC model, it will gain even more leverage over retailers who will pay top dollar (in raw cash, working capital, or in margins) to have this technology in stores. We don’t think Nike will talk about this specifically, but we think it becomes a part of the discussion in the next calendar year. 



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