Takeaway: NKE might be the best long-term idea we can find, but there are some serious short-term factors that will cause big buying opportunities.

Conclusion: We think that Nike is perhaps the best idea in retail as EPS more than doubles to nearly $5/shr, which is huge for a large cap name that is already operating at peak margins. The company should add $10bn in revenue over 4-years from e-commerce alone, which should take gross margins at least 5-points higher, past the 50% mark (a level most never thought achievable). But this transformation will also make its Futures model obsolete, and we think it’s a matter of time before it’s no longer reported to the Street. That won’t happen today. But we’ll inch closer as each quarter passes and earnings surprises on the upside, while the order book goes the other way. That’s going to create some fantastic buying opportunities. Though the Olympics and slightly better FX should help order levels and the company’s outlook, we’d rather wait for a point where there is some critical misunderstanding of the company’s growth and financials to make a ‘step in and buy before the event’ call. That does not exist today.



We like a lot more about Nike than we don’t, and the story is arguably more investable than ever. This company and story have become extremely complex, but the basic building blocks of what we like can be placed in the following buckets

a) Investing at a greater rate than ever in its product engine resulting in an arsenal that even its strongest competitors can’t replicate

b) Changing up the manufacturing paradigm for the first time in 40 years (initially what most of us know as FlyKnit – but this will change soon), which not only creates margin and working capital opportunities, but also gets Nike even closer to market (i.e. it will get 2-3 months out in an industry that is locked into a 5-6 month order window).

c) Dropping its attitude of deference and respect for the traditional footwear retailing channel, and getting the right product into the hands of the right consumers regardless of the poor growth and real estate decisions made by Nike’s traditional wholesale channel over the past 20 years.


Put these together, and we think that you’re looking at an incremental $10bn in sales at a 70% gross margin (vs $31bn in sales at a 47% margin today). When all is said and done, we think that gets you to almost $5 in EPS in four years versus the $1.85 it earned last year. Yes, earnings should more than double in 4-years for a large cap name with stable growth, a bullet proof balance sheet ($3/sh in cash), 75%+ share in some of its core businesses, dominant positioning in a global duopoly, and a structural advantage that could potentially never be overcome (i.e. what Google has over Yahoo).  Does it make sense to us that Nike is trading at an all time high price and multiple? Of course it does. But that doesn’t mean it’s expensive – at least for someone that follows our train of thought.


Now, please allow me to talk out of the risk management side of my mouth. This name might look ridiculously expensive for a person with a very short (TRADE) duration, who is only looking in the rear-view. They’ll see peak margins, a peak 30x multiple, and a futures growth rate (THE key stock driver) that has been running at a double digit rate for the past 10 quarters with a risk to reversion to a longer-term mean of 7-9%. Tack on short interest that is running at just 1.1% of the float (basically nonexistent), and the simplest roll in futures could send this name tumbling.


Two considerations

  • The first is that the Olympics this summer will definitely boost Nike’s order book. Now…if the futures rate STILL rolls over despite the Olympics, then Houston has a problem. Unlikely. But a strong consideration.
  • Second is that if we’re right, which we obviously think we are, then we’re going to see more than half of growth come from DTC channels – as we saw last quarter when Nike proved to be its own biggest growth engine for the first time in history. But think about it…If we see a $50 wholesale order that used to show up on the order book (futures) all of a sudden turn into a $100 fully consolidated sale through Nike DTC (online, retail), then we’ll have sales, margins and earnings going higher, but futures going lower. This is critical, as when this trend hits critical mass, we’re likely to see Nike start to consistently beat earnings and cash flow, but miss on an increasingly arbitrary statistic known as Futures.


The question then is when will PWC recommend to Nike that they stop reporting futures altogether. We think that is a near mathematical certainty. But, will Nike do so during a quarter when they are crushing it on every metric – including futures? Or will it happen in response to an otherwise ugly futures number that is the result of the wholesalers (like FL) tapping out on their ability to order more product because that part of the business is in a decline?  Nike always talks about playing offense. Let’s see if they do it right this time. We’re not worried about a change happening with tonight’s print. But a change should definitely be in the works.


Until then, this is a name for long term investors to buy on red as futures numbers revert. 

CHART OF THE DAY: Our High Conviction Call? The Cycle Slows

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"... Sure, we’ve seen some episodic hope that components of the most cyclical part of The Cycle (Energy, Commodities, Industrials, etc.) have slowed at a lesser rate.


But post last week’s Chinese and US Industrial Production (IP) data for FEB slowing again (US IP slowed to -1.03% year-over-year), hope is not an intermediate-to-long-term risk management #process."


CHART OF THE DAY: Our High Conviction Call? The Cycle Slows - 03.22.16 Chart

Are You Relaxed?

“Do I live a more relaxed life?”



“Nowadays, I can dash off an email, send it half way around the globe, and receive a reply a minute later. I’ve saved all that trouble and time, but do I live a more relaxed life?”


That was an important question I started to think about the other day while I was reading Yuval Noah Harari’s Best Seller, Sapiens. “We have invented countless time-saving devices that are supposed to make life more relaxed…” (pg 87)


But do they? Maybe it’s just me, but there is absolutely nothing relaxing about watching people being blown up this morning in Brussels and, at the same time, watching others race to tweet and trade macro markets on it “being priced in.” #Sad


Back to the Global Macro Grind


I’m not going to ask you for your time this morning. I’m going to ask you to do this for yourself. Stop what you are racing to reply to via text. Stop being imprisoned by your inbox. And just take some time to breathe and think about what you are doing.


Are You Relaxed? - meditation




If you didn’t just shut everything off and start thinking about where the world’s rates of change is going next, I’ll keep you entertained for the next 5 minutes of your time. Let’s start with a very basic question:


Q: From an economic, profit, and credit cycle perspective, what’s really changed in the last month?


A: The Cycle


Yep. That’s it really. Since I didn’t ask what’s happened to “stocks” (I realize your monthly-reporting-period of manic return chasing matters but that wasn’t what I was asking about), the answer is very obvious. The Cycle continues to slow.


Sure, we’ve seen some episodic hope that components of the most cyclical part of The Cycle (Energy, Commodities, Industrials, etc.) have slowed at a lesser rate.


But post last week’s Chinese and US Industrial Production (IP) data for FEB slowing again (US IP slowed to -1.03% year-over-year), hope is not an intermediate-to-long-term risk management #process.


How about on the latest parts of the cycle?


  1. US CONSUMER – 2-year comp for US Retail Sales slowed (again as real consumption growth peaked in 1H of 2015 – and US Consumer Confidence (after peaking in Q1 of 2015) hit new #LateCycle lows too
  2. HOUSING – post the worst rate of change report for Pending US Home Sales (2 weeks ago), Existing Home Sales for FEB (reported yesterday) dropped -7.1% month-over-month (despite the weather) to -1.4% year-over-year
  3. HEALTHCARE – as pricing, capacity utilization, margins, and relative earnings growth all put in their 2015 peaks, Healthcare stocks (XLV -6.7% YTD) have turned out to be the worst performing sector in the SP500 in 2016


I know. I know. I shouldn’t have mentioned the “stocks.” Sorry about that. I was being too short-term there for a second. For intermediate-to-long-term investors, getting The Cycle (fully loaded – economic, profit, and credit) right is what matters most.


Isn’t it fascinating though that most consensus economists that missed the industrial/cyclical #Recession call altogether are now quite confident about the recovery?


Forget the consumer-cyclicals like Autos and Housing (both of those cycles peaked in OCT 2015) for a second and look at a 1 and 5 year chart of the Industrials (XLI):


  1. The Industrial Stocks (XLI) doubled (up +100%) from their 2011 lows
  2. Then put in a cycle peak (as rate of change of growth peaked) between Q4 2014 and Q1 2015
  3. And effectively crashed from there in expectations terms (XLI -18%) from Q115 to FEB 2016


Then a +15% v-bottom bounce in the last month and everything global demand, energy, charts, etc. is off to the races again? Talk about some super short-term #HPAD (hedgie performance anxiety disorder) there. Wow.


Since I don’t have to make excuses for being the short-term chart chaser (I made Industrials one of our favorite S&P Sector Shorts in Q1 of 2015 #timestamped) and I’ve preferred the Financials (XLF) as a favorite short in Q1 of 2016, I’m thinking:


A) I might need to make Industrials (XLI) a “fav short” again for Q2 2016…

B) Or should I be thinking it’s more obvious to short Housing (ITB) from here?


Since my highest conviction call is The Cycle (slowing), this is going to be a tough one for me. I really like the Financials (XLF) on the short side, so it’s going to be hard to take that off for Industrials or Housing (or Utilities and Gold off the long side).


But I do believe that my being less consensus-manic in the last 6-18 months has bought me some serious time to think this through. So I’ll relax and get back to you on that, maybe in a few weeks.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.80-1.98% (bearish)

RUT 1055-1109
EUR/USD 1.09-1.13
Oil (WTI) 36.08-42.53

Gold 1 (bullish)

Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Are You Relaxed? - 03.22.16 Chart

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Volume, Housing and Europe

Client Talking Points


The relationship between volume and volatility (relative to price) remains core to how we model trending risks. As they chased the charts to another lower-high (price) yesterday (SPX), total U.S. Equity Volume (including dark pool) was -13% vs. its 1 month average as front month equity VIX held the 12-14 level it held during JUL and OCT.


Another bad U.S. #HousingSlowing data point yesterday (Existing Home Sales -7.1% month-over-month and -1.4% year-over-year) keeps what we liked most at this time last year (Housing, Healthcare, Consumer – all #LateCycle consumption + employment peaks) on the short side this year. Housing stocks (ITB) are +20% “off the lows” from FEB with the data only getting worse.


Disgusting act of terror aside, it’s important to contextualize where European Equities were ahead of this news – DAX, MIB Index, and IBEX all just failed @Hedgeye TREND resistance (again) yesterday. Italy was -2% last week to -13% year-to-date, tried the bounce yesterday and is down -1.6% this morning as the Draghi #BeliefSystem breaks down.


*Tune into The Macro Show with Housing and U.S. Macro analyst Christian Drake at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

Utilities (XLU) hasn’t bounced as much as leveraged , high-beta resource names, but the outperformance is greatly divergent vs. both the market, and our preferred sector short in financials (XLU +12.3% YTD, S&P -0.3% YTD, XLF -4.6% YTD).


General Mills (GIS) remains one of analyst Howard Penney's top Long ideas in the Consumer Staples space. As we have continued to say, it boasts style factors ideal during turbulent times; high market cap, low beta and liquidity. Case in point, GIS is up 7% year-to-date, versus essentially flat for the S&P 500 in 2016. We'll have an update next week after GIS reports earnings.


Long-Term Treasuries (TLT) finished +1.9% on the week. Aside from Mr. Market, the Fed downwardly revised expectations (the common lag) on Wednesday:

  • The median 2016 GDP forecast revised to +2.2% vs. +2.4% in December
  • The median 2016 PCE Inflation forecast revised to +1.2% vs. +1.6% in December
  • Median Federal Funds end-2016 rate forecast revised to 0.9% vs. +1.4% in December

From a GROWTH, INFLATION, POLICY perspective, it’s lower for longer on growth and inflation and a more dovish Fed.

Three for the Road


VIDEO (2mins) Joke of the Year? Fed Data Dependence



The difference between the impossible and the possible lies in a man's determination.

Tommy Lasorda


Yesterday, Apple announced that 93% of its facilities run on renewable energy, including 100% of its facilities in the U.S., China, and 21 other countries.

LNKD | Tracker Update (Talent Solutions)

Takeaway: Our tracker suggests that LNKD isn't seeing the recession that its guidance is calling for. However, we remain on the sidelines for now


  1. SEASONAL BUT MARKED IMPROVEMENT: Our LNKD JOLTS tracker improved sequentially into the first month of 1Q16, which is expected given seasonality in LNKD's selling environment.  But as we've mentioned previously, 4Q15/1Q16 is more about magnitude than direction; the former is fairly strong QTD.  As a reminder, our LNKD Talent Solutions TAM analysis suggests that the bulk of that TAM is in the upsell opportunity (ARPA) vs. new account volume.  Note that LNKD will no longer be reporting its Talent Solution customer counts, so we will not be able to calculate ARPA anymore (but that doesn't mean we can't use the tracker).   
  2. BUT DEAD MONEY FOR NOW: LNKD's 2016 guidance is basically implying a recession since it essentially calls for declining ARPA and/or net new LCS account growth.  Our tracker update suggests LNKD wasn't seeing the recession that its guidance is calling for when it issued it.  We expect a beat/raise on the 1Q16 release is even more likely now, but we're not sure the street will chase the print.  We suspect it will take more than one positive earnings release to regain the trust of the street after mgmt tattooed its holders on the 4Q15 release (especially after deciding to pull its LCS account metric).  We remain on the sideline for now.   

See the note below for additional detail on LNKD's 4Q15 release.  Let us know if you would like to discuss further.  


Hesham Shaaban, CFA




LNKD | Tracker Update (Talent Solutions) - LNKD   ARPA vs. JOLTS 1Q16  Jan

LNKD | Tracker Update (Talent Solutions) - LNKD   TS 2016 Guid Scen 1


LNKD: Guidance = Recession
02/05/16 09:50 AM EST
[click here]


Early Look

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