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INSTANT INSIGHT | Central Planning, China, & the Russell 2000

Yesterday was the first day of trading in 2016. It wasn't pretty. In case you missed it, there was a broad selloff in global equity markets.


INSTANT INSIGHT | Central Planning, China, & the Russell 2000  - China cartoon 01.05.2015


First up on our red data radar screen, China's Shanghai Composite Casino. It dropped as much as 7% on the day. In response, the Communist politburo responded with a full-court press. Here's what Hedgeye CEO Keith McCullough had to say about it in a note to subscribers this morning:


"The communists did everything they could to centrally plan China’s markets overnight – stopped the Yuan at 6.516 and the State bought stocks! Lol – that went over as well as it did in AUG didn’t it? #GrowthSlowing and #Deflation remain the gravity point."



Oh, and let's toss in the Russell 2000... 


"Liquidity-traps and US domestics slowing remain great reasons to be out of or underweight small caps – RUT -2.3% yesterday (vs. SPX -1.5%) and is now -14.4% from the all-time #Bubble high we called in July. We're reiterating sell on bounces." 


INSTANT INSIGHT | Central Planning, China, & the Russell 2000  - Russell cartoon 12.02.2014


We'll conclude with a parting thought to Wall Street consensus which was screaming "buy the dip!" yesterday:


"Buying the dip" has only worked in a narrow group of momentum stocks. The rest of the market is crashing. 

Cartoon of the Day: The Scream

Cartoon of the Day: The Scream - Bull SCREAM 01.06.2015


A perfect storm of risks and uncertainties is weighing on global markets.


"Yesterday marked the worst Day 1 for US stocks since… drumroll… the last US #Recession started to get discounted by markets (2008)," Hedgeye CEO Keith McCullough wrote in a note to subscribers this morning.


No, we're not bullish.



NKE | This is B-I-G

Takeaway: New FlyKnit tech changes up the shoe manufacturing paradigm for the first time since Phil Knight created a futures model 40yrs ago.

Make no mistake...this is B-I-G.


A new patent suggests that Nike plans to give users much greater control over the customization of Flyknit sneakers, which is right in line with our contention over the past two years.


The implication here is that it will commercialize the ability for Nike to 'Mass Customize' its high-end product at an above-average margin without taking up price. The FlyKnit manufacturing units outlined below will, we think, be in three different places…

  1. Nike Stores: This will be a Brand experience. Imagine creating product on a kiosk, then swiping a credit card (or using ApplePay), and immediately seeing your shoes being created right in front of you. One shoe might be a size 9, while the other might be a size 9 1/2 -- most people have two different sized feet, but the old paradigm simply did not allow for it. This change is huge -- it's akin to when the stock market went from pricing securities in fractions to pricing in decimal points.
  2. Nike Factories: Imagine a warehouse space that is filled with 100 FlyKnit Units. Users can go online, design shoes, and then receive the customized product overnight just as fast as they'd receive shoes from Zappos -- but they'd be customized. This is one of the factors that gives us confidence that Nike will add $10bn in e-commerce revenue over 5-years at a 70% Gross Margin (vs 46% today).
  3. Wholesale Accounts: Yes, Nike is likely to ultimately put the technology in the hands of its wholesale customers -- but only AFTER it has the technology firmly in place for it's own use. Also, style count would be restricted. Nonetheless, the wholesaler (FL) would pay for the customization technology, the Nike employees that would need to be on hand, the inventory, and all the other wholesale inventory that Nike invariably will stick them with.


The irony is that most times we discussed this with investors in recent years, we were met with one of two responses 1) that's too far in the future to matter, or 2) it's probably not happening, because I call the company and they say you're wrong.


As for point number 2...Of COURSE they'll say we're wrong! They don't want the retailers to know how serious they are about scaling up this technology, so they downplay it materially.


But in the end, this changes up the shoe manufacturing paradigm for the first time since Phil Knight created a Futures model 40-years ago. And to be clear, no one is remotely close to where Nike is in this regard. They can catch up, but Nike has been allocating capital to this initiative as far back as 2004 (to it's 'Considered' product line). We wish competitors all the best in catching up without outsized capital spend and subsequent lower margins.


Patent Info 


NKE  |  This is B-I-G - 1 5 16 chart1

Abstract: Computer based systems and methods for designing (e.g., customization) of consumer products, articles of footwear, knit footwear uppers, and the like. In some embodiments, a user may generate and/or modify footwear designs using a design interface. Additionally or alternatively, the footwear design interface may be configured to simulate the layout and/or operation of a knitting machine to provide the user with the impression of physically designing and/or manufacturing an article of footwear. In other embodiments the system may disallow prospective footwear design changes based on limitations associated with inventory availability and the footwear design characteristics.


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The Macro Show Replay | January 5, 2016


China, Russell 2000 and Yield Spread

Client Talking Points


The communists did everything they could to centrally plan China’s markets overnight – stopped the Yuan at 6.516 and the State bought stocks! LOL – that went over as well as it did in AUG didn’t it? #GrowthSlowing and #Deflation remain the gravity point.


Liquidity-traps and U.S. domestics slowing remain great reasons to be out of or underweight small caps. The RUT was down -2.3% yesterday (vs. SPX -1.5%) and is now down -14.4% from the all-time #Bubble high we called in July – reiterating sell on bounces.


There is a new 12 month low here for the 10/2s spread at 119 basis points – this is actually the flattest the curve has been post the last U.S. recession; back to back ISM reports < 50 will do that (last time that happened was 2009) #GrowthSlowing.


*Tune into The Macro Show with Hedgeye CEO Keith McCullough live in the studio at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

With the Fed's 25 basis point hike in interest rates, in the financial sector, FII stands to benefit most from even this marginal change.


In essence, Federated Investors (FII) has a stable business for what we think will be a volatile 2016. 2015 finished with slight positive inflows into the firm's main business line, money market or cash products. This is reminiscent of the start of cash builds in 1999 and 2006 ahead of the negative returns in risk assets in 2000 and 2007.


RH is our top long idea in all of retail, and we view the recent weakness in the stock as a buying opportunity. All in we think the company will build to $5bn in sales at mid-teens operating margin which equates to $11 in earnings power. This growth and profitability comes from...

  •  ~30% Square footage growth with new full line design galleries.
  • New businesses, like Modern and Teen, that can be easily layered over its low cost infrastructure.
  • Leveraging occupancy from the "sweet heart" real estate deals the company is getting as a high end traffic driving tenant willing to take anchor size leases. 

The yield spread (10Y’s -2Y’s) compressed to a 52-week low of 120 basis points last week.  AGAIN, that’s a 52-week low in growth expectations right after “lift-off”. Into year-end, the bond market continues to price in what it has all year long: #Slower-and-lower-for-longer.


We continue to believe deflation will pressure the policy-fueled leverage embedded in junk and high yield bond markets. The cheap money, corporate credit boom inflated asset prices and it has more room to deflate. This deflationary run started in the second half of 2014, with the introduction of our #Deflation theme. Back then, was also the low in cross-asset volatility and the high in outstanding corporate credit (commodity producers chasing inflation expectations were the largest contributor).

Three for the Road


5 Must-See Clips Distilling Hedgeye's Best Ideas https://app.hedgeye.com/insights/48361-5-must-see-clips-distilling-hedgeye-s-best-ideas



Time is money.

Benjamin Franklin


Yesterday was the sixth-worst start to a year since 1927 for the Standard & Poor’s 500 Index, which fell 1.5% to erase $289 billion in market value. 

January 5, 2016

  • Bullish Trend
  • Bearish Trend
  • Neutral

10-Year U.S. Treasury Yield
2.32 2.16 2.24
S&P 500
1,998 2,039 2,012
Russell 2000
1,092 1,142 1,108
NASDAQ Composite
4,875 4,995 4,903
Nikkei 225 Index
18,111 19,118 18,450
German DAX Composite
10,118 10,633 10,283
Volatility Index
17.21 23.51 20.70
U.S. Dollar Index
97.67 99.41 98.92
1.07 1.10 1.08
Japanese Yen
118.71 121.02 119.40
Light Crude Oil Spot Price
35.16 38.26 36.88
Natural Gas Spot Price
1.81 2.48 2.29
Gold Spot Price
1,055 1,085 1,073
Copper Spot Price
2.06 2.16 2.08
Apple Inc.
103 109 105
Amazon.com Inc.
618 670 636
Alphabet Inc.
749 791 759
Walt Disney Company, Inc.
101 106 102
Netflix Inc.
107 116 109.96
Facebook Inc.
101 105 102


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.


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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.