• run with the bulls

    get your first month

    of hedgeye free


US STRATEGY – Gaining Traction

The S&P 500 turned an exceptionally strong performance on Tuesday, finishing around its best level for the day.  Volume was up 9% day-over-day and breadth expanded significantly.  As the market is getting stronger there is seemingly a pickup in the appetite for increased risk.  The dollar index has now fallen 4 of the last 5 days and was down 0.62% yesterday.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (79.68) and sell Trade (80.86).


Yesterday’s FOMC meeting was anticlimactic.  The central bank reiterated that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period.  See Keith’s post from yesterday “FOMC Pandering: Trader Vik like it” for our position on this subject.  


Again the MACRO data points provide some headwind, but are being brushed under the rug.  Yesterday, housing starts in the US fell 5.9% month-to-month in February, but the decline was due mostly to weather related issues.  Although the news from the Euro zone is slightly more positive as the finance ministers said that they are ready to help Greece with an emergency support facility, if needed.  There also seems to be very little concern about the potential for an “angry client” - see yesterday’s Early Look for more details.   


Last night China rose for the second day in a row, rising 1.93% - the second biggest day of 2010! The Chinese crash callers are everywhere, as we believe that the widely expected additional tightening measures are already priced into the market.  We are long China through the CAF.


On the back of a weaker dollar and a better performing Chinese market the two best performing sectors yesterday were Materials (XLB) and Industrials (XLI).  The Fertilizer names were underpinned by upbeat inventory data, while NEM, WY and X all outperformed.  CF industries was the only stock to decline in the XLB yesterday.


While consumer stocks lagged the broader market today, LBO speculation runs rampant and is reminiscent of 2007.  Yesterday speculation was that HOG would go private; the stock traded up 7% on big volume. 


Volatility declined 1.72% yesterday, while the VIX continues to be broken on TRADE, TREND and TAIL.  The Hedgeye Risk Management models have levels for the volatility Index (VIX) at:  buy Trade (17.16) and sell Trade (18.79). 


As we wake up today, Equity futures are trading above fair value in a continuation of yesterday's upward momentum and firmer global markets.  As we look at today’s set up the range for the S&P 500 is 19 points or 0.6% (1,144) downside and 1.1% (1,163) upside.


Today's MACRO highlights will be:

  • MBA Mortgage Applications came in at -1.9% (it was the weather of course)
  • Feb PPI (up 4.9% YoY)
  • DOE Crude Oil, Natural Gas Inventories

In early trading, copper is trading higher as the dollar is trading lower.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.24) and Sell Trade (3.43).


In early trading Gold is also benefiting from a lower dollar.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,108) and Sell Trade (1,140).


OPEC agreed for the fifth time since 2008 to keep its production limits unchanged, even as some members voiced concern that supply may be too high.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (79.90) and Sell Trade (83.10).


Howard Penney

Managing Director


US STRATEGY – Gaining Traction - sp1


US STRATEGY – Gaining Traction - usd2


US STRATEGY – Gaining Traction - vix3


US STRATEGY – Gaining Traction - oil4


US STRATEGY – Gaining Traction - gold5


US STRATEGY – Gaining Traction - copper6


The Seeds of Manipulation

When people learn no tools of judgment and merely follow their hopes, the seeds of political manipulation are sown.”

-Stephen Jay Gould


Modern day science lost an important mind when Stephen Jay Gould passed away in 2002. He was only 60 years old, but had already contributed a great deal of biological research on the evolution of man. Many of Gould’s research essays were collected in volumes with titles like “Ever Since Darwin.” He developed the theory of “punctuated equilibrium”, where evolutionary change occurs much more rapidly than during longer periods of stability.


I wake up every morning with a hope that our financial leadership and thought processes about markets and risk evolve. Hope, unfortunately, is not an investment process, and I often find myself getting frustrated. Sometimes it’s pretty obvious in my writings; I get that.


But do politicians around this world get it? Let’s consider this morning’s global macro news run:

  1. “I wish there was a miracle, but all we can do is persist with our efforts.” –Bank of Japan Governor Masaaki Shirakawa
  2. “All we can do on the Monetary Policy Committee is stand ready to react” –Bank of England Deputy Governor Charles Bean
  3. “The only way we will change them is by forcing them to change” –Senior United States Senator (NY) Chuck Schumer on China

Collectively, I don’t even know how to start summarizing these statements. This is getting bad. The Bubble in Global Politics seemingly has no peak in sight. We are all hostage to the Seeds of Political Manipulation.


Setting aside how ridiculous Schumer’s comments about America’s Creditor (China) are, let’s consider where these comments from Japan and the UK are coming from this morning.

  1. In Japan, the BOJ left interest rates unchanged at ZERO percent for the umpteenth time in the last few decades (really successful economic policy model for America to follow by the way – who needs to evolve and learn from that?) and implemented a fresh 20 TRILLION Yen, 3-month loan facility, to inject more liquidity into their politically compromised bureaucratic bubble economy.
  2. In the UK, with Gordon Brown leaning as far left as he can possibly bend in order to save his political career, monetary policy politicians are trying to reconcile why this thing called inflation has reared its ugly head into their compromised government inflation reporting system. Inflation in the UK is running up +3.5% all of a sudden. That’s well above their stated target. That’s what happens when you burn the value of your currency.

Again, I can’t go on the record addressing these China comments from Schumer. I just deleted what I wrote about them. I cannot get my head around them in anything that resembles a professional way. Back to Japan and the UK:

  1. What is 20 TRILLION Yen going for these days anyway?
  2. In the UK, are they admitting what American monetary policy makers wouldn’t dare? That setting policy is a reactive exercise?

We regularly beat this point to a dead pulp, but real people in this world are coming up with real proactive plans to prevent crises. Meanwhile, we have mathematically and scientifically incompetent politicians around this word sowing the seeds of their own mindless market manipulation, then reacting to what they themselves planted?


Now I have a headache.


Back to the math, twenty TRILLION Yen equals $222 BILLION Dollars. Oil is trading up at $83/barrel and copper at $3.40/lb this morning. Western and Japanese governments are creating more money than God himself could count.


Printing moneys for an “extended and exceptional” period of time will end with inflation that politicians will be reacting to and “wishing for a miracle” that the rest of us who aren’t paid to be willfully blind don’t see.


Sorry China. That’s all we can say this morning about Schumer’s comments. Sorry. He’s just another American politician who “has learned no tools of judgment” who is “merely following his own political hopes.” Please don’t sell your Treasuries. Please.


My immediate term support and resistance lines for the SP500 are now 1144 and 1163, respectively. I have 17 longs and 8 shorts in the Virtual Portfolio, and if the market is up today on these hopes of globally socialized losses, I intend on selling into them.


Best of luck out there today,





USO – United States Oil — Despite a sharp correction in oil prices on 3/15/10, the price of WTIC oil remains in a bullish intermediate term position with TREND line support at $77.39/barrel. Buying on red.


CAF – Morgan Stanley A Share — Now that all of the inflation data we have been calling for is on the tape, China's stock market looks like it wants to tell us the news is now baked into the expectations cake. Buying China low.


XLV – SPDR Healthcare — Healthcare was down again on 3/9/10 in the face of “Obamacare” inspired fear. While we fear we may be early here, it’s better than fearing fear itself.


UUP – PowerShares US Dollar Index Fund — We bought the USD Fund on 1/4/10 as an explicit way to represent our Q1 2010 Macro Theme that we have labeled Buck Breakout (we were bearish on the USD in ’09).

CYB - WisdomTree Dreyfus Chinese Yuan —The Yuan is a managed floating currency that trades inside a 0.5% band around the official PBOC mark versus a FX basket. Not quite pegged, not truly floating; the speculative interest in the Yuan/USD forward market has increased dramatically in recent years. We trade the ETN CYB to take exposure to this managed currency in a managed economy hoping to manage our risk as the stimulus led recovery in China dominates global trade.

TIP - iShares TIPS — The iShares etf, TIP, which is 90% invested in the inflation protected sector of the US Treasury Market currently offers a compelling yield. We believe that future inflation expectations are mispriced and that TIPS are a efficient way to own yield on an inflation protected basis.



XLP – SPDR Consumer StaplesConsumer Staples was the best performing sector on 3/15/10 in our S&P Sector Model and was immediate term overbought.


SPY – SPDR S&P500We moved to neutral (from bearish) on the S&P500 on the week of February 22. At 1139, for the immediate term TRADE, we’ll go back to bearish. This market is finally overbought. We shorted SPY on 3/5/10.


EWP – iShares SpainThe etf bounced on 3/3/10 in part from a strong day from Banco Santander, the fund’s largest holding in the Financials-heavy (43.8%) etf. We shorted Spain for a TRADE again on 3/5 as every sovereign debt risk has a time and price to be short of. We have a bearish bias on the country; massive unemployment, public and private debt leverage, and a failed housing market remain fundamental concerns.


IWM – iShares Russell 2000With the Russell 2000 finally overbought from an immediate term TRADE perspective on 3/1/10 and added to it on 3/2; we got the entry price that the risk manager makes a sale on strength.


GLD – SPDR Gold We re-shorted Gold on this dead cat bounce on 2/11/10. We remain bullish on a Buck Breakout and bearish on Gold for Q1 of 2010, as a result.


IEF – iShares 7-10 Year TreasuryOne of our Macro Themes for Q1 of 2010 is "Rate Run-up". Our bearish view on US Treasuries is implied.


BKC downplayed the potential traffic impact from removing the dollar double cheeseburger off the menu in mid-April at an investor conference today.  Just last week, JACK’s CEO Linda Lang stated that she thinks the industry will see some immediate relief on the discounting front when BKC removes the dollar double cheeseburger from its menu.  MCD raised the price on its dollar double cheeseburger in December 2008 in response to rising commodity costs.  During the first full quarter after the change, MCD reported that over 50% of customers stayed with the double cheeseburger at about $0.20 more.  During 1Q09, the Dollar Menu dropped to 10% of sales, from the typical 13%-14% range, which helped margins without hurting traffic. 


BKC could experience the same margin benefit from raising the price on its double cheeseburger in April.  One major difference between the MCD and BKC situations is that MCD had the dollar double cheeseburger on its menu for some time prior to raising the price whereas BKC had just gone national with its dollar double cheeseburger in October.  On its last earnings call, BKC stated that the dollar double cheeseburger promotion largely drove the sequential quarterly improvement in same-store sales, leading to positive traffic growth and gross profit dollars in the U.S. YOY.  It might be harder for BKC to maintain this positive traffic momentum when this promotion goes away.


Notes from today’s management presentation:


Strong global presence

  • 90% franchised
  • US and Canada is 2/3 in terms of sales and profitability
  • Growing across the world
    • Setting new highs in restaurants every month
  • 80% of unit growth is coming from outside of US and Canada
  • Stable base of new restaurant count  in NA

 Appealing brand

  • Business generates good cash flow
  • Unit economics are sounds

 Growing brand profitably

  • Driving ARS growth
  • Innovation around building business
    • Menu mix
    • Enhancing value
    • Dollar double cheeseburger moved the needle

 Running great restaurants

  • Satisfaction scores are at record levels
  • Leveraging assets, systems and analysis tools, to drive profitability
    • P&L benchmarking
    • Four corner pricing model

 Investing wisely

  • Biggest opportunity is image, improving image
  • Investment in system
    • Franchisees and company have spent a lot on POS systems etc.
    • Remodeled 140 restaurants with company money in the last three years and returns continue to impress

Franchise relations

  • Aligning people with the strategy
  • Continuing to work with franchisees



  • Unemployment
  • Consumer slowdown
  • Uncertainty

 BKC focus

  • Cost containment
  • Development
    • Great time to get after quality sites
  • Improving comparable sales and traffic
    • Competing better with competitors



  • Restaurant count growing – over 12k
  • Comps down worldwide
  • ARS are stable
    • In US and Canada there has been significant improvement over last few years

 US and Canada

  • 24% increase in US and Canada system ARS to 1.24M from 1.0M in FY2004
    • ARS goal is $1.5M
  • Completed 2 years of net restaurant growth
  • Reimaging program yielding solid ROI
  • Portfolio management
  • Operational efficiencies continue to be incorporated in company system

 Robust product pipeline

  • Flame broiled taste
  • Quality
  • Size at affordable prices

 Continuing growth

  • More competitive hours – 7 of top 10 franchisees operate 24 hour restaurants, company units adopting same policy
  • CRM’s continue to be a focus
  • Development and reimaging
    • Reflags have posed interesting opportunities to expand into new markets
  • Remodels can see 15% in sales uplift
  • Analytics driving operational excellence

 Long Term Financial Targets (unchanged)

  • Comp sales up to 2% or 3%
  • Average annual net restaurant growth of 3% or 4%
  • Average annual revenue growth of 6% to 7%
  • Average annual EBITDA growth of 10% to 12%
  • Average annual EPS growth of 15%



Q: Relationships with franchisees, how did it impact your P&L?

A: Did not impact BKC’s P&L, affected momentum of getting things done. Have executed what was intended but not as quickly as was initially desired.  The company has been on a campaign to be more effective communicating with franchisees.


Q: Impact of a jobless recovery on your business?

A: A jobless recovery makes it a longer term play for BKC, not a shorter term play.  Unemployment rate is very important for BKC.

Come the fall, BKC will be leading with a lot of breakfast activity and coffee products. If the unemployment situation doesn’t continue to improve, it will be a tough 2010, but things seem stable enough right now to do it.


Q: Any indications of economic recovery? How concerned are you with replacing $1 double cheeseburger?

A: Haven’t seen change in industry negative traffic trend that was seen over the past four or five months.  BKC not expecting an enormous amount of improved stability until negative trend changes. 

In terms of dollar double cheeseburger, in April, the buck double will be a single slice of cheese with two patties, supported by advertising. The double cheeseburger will be available for more than $1.  Media weight behind the buck double will hopefully add to the appeal.  Customers like the product with less cheese better…that’s coming in mid to late April.

In testing the buck double for guest appeal, we believe that the traffic impact will not be negative.  Not able to test that in the midst of a higher dollar double cheeseburger, of course, but we are confident that the product will do well.


Q: Accelerating remodel program?

A: Generally speaking, most of the estate is tired, you have to do exterior and interior. We’ve perfected the decision making process of which units to remodel when and at the pace currently being set it would take 10 years. Need to find more capital to accelerate.  Franchisees are not required to do it but they are doing it, they see the returns.

Want to raise the minimal standard for the system also.  The brand five or six years ago did a lot of shabby remodels and that has come home to roost.


Howard Penney

Managing Director

Attention Students...

Get The Macro Show and the Early Look now for only $29.95/month – a savings of 57% – with the Hedgeye Student Discount! In addition to those daily macro insights, you'll receive exclusive content tailor-made to augment what you learn in the classroom. Must be a current college or university student to qualify.

FOMC pandering: Trader Vik Likes It!

Vikram Pandit may or may not know this but execs on the trading floor of Morgan Stanley used to call him “Trader Vik.”  No, that wasn’t a compliment. Eventually Pandit delivered on his nickname’s promise by blowing up his hedge fund, Old Lane.


All that said, with today’s news from Ben Bernanke that American savers will continue to earn ZERO rate of return on their savings accounts while the US Government feeds the pig, now even Trader Vik can make money!


Today, the FOMC has decided to keep interest rates at ZERO for an “exceptional and extended” period of time. This politicization of the short end of the yield curve will continue to feed the Piggy Banker Spread (the spread that Vik’s government owned Citigroup gets to chow down on as they borrow short from the government and lend long to the citizenry).


If you don’t like the conflicts and the compromises associated with the smile on this man’s face, too bad. This is a Washington controlled America and, for now, we have to see this for what it is.


I have immediate term resistance for the pain trade in the SP500 up at 1162; immediate term support is now 1143.



Keith R. McCullough
Chief Executive Officer


FOMC pandering: Trader Vik Likes It!   - Trader Vik

PSS: Let the (WMT) Resets Begin

We’re starting to see broader evidence of Wal-Mart shift its focus away from footwear, which is positive for PSS on the margin. Back in July ’09 we highlighted the emergence of this theme, though evidence has been slow to come. In our ongoing analysis of Wal-Mart and its impact on everything else retail, we’ve been noticing enough tweaks to the assortment recently such that we thought it was time to break out the digital camera. Yes, the pictures below are from only one store, and there can be an endless number of variables impacting that specific store at that specific time on that specific day. But the step up we’ve seen in activity at Wal-Mart to change up its shoe department has been enough such that we think the pictures below tell a directionally accurate story.


When we look at quantifying the impact… Wal*Mart did $305bn in the US last year. About 11% of that was apparel, footwear, and accessories. Only about 100bps-200bps was driven by footwear, which suggests about $5bn annually.


The table below shows the store overlap between Wal-Mart and Payless. A quarter of Payless stores have a Wal*Mart within a mile radius. 43% have a WMT within 5 miles.


Let’s say Wal*Mart scales down footwear to 1% of sales over 3 years as it cycles through its remodel process. That suggests over $2bn is up for grabs. If I take it a step further and assume that 38% is within reach (within a 3-mile radius), then that’s $760mm. If PSS grabs only 10% of that, it would be a 2% comp alone. At a 30% incremental margin, we’re talking $0.23 per share. That’s off a base of $1.28 last year.



PSS: Let the (WMT) Resets Begin - PSS WMT 6 3 10


PSS: Let the (WMT) Resets Begin - PSS WMT 1 3 10


PSS: Let the (WMT) Resets Begin - PSS WMT 2 3 10


PSS: Let the (WMT) Resets Begin - PSS WMT 3 3 10


PSS: Let the (WMT) Resets Begin - PSS WMT 4 3 10


PSS: Let the (WMT) Resets Begin - PSS WMT 5 3 10



NKE: Tiger Adds to The Mo Mo

Shortly after 11am, it hit the tape that Tiger will be returning to professional golf by playing in The Masters next month.  One can argue that the $0.20ps that the stock jumped since then is in reaction to the news. We’d step back and ask the broader question as to who had the inside information and bought the stock accordingly pushing the stock from $64 to $71?


Regardless, this is good for Nike – from both a business standpoint and as it relates to price momentum. Keep in mind a few things…NKE is one of the few sponsors that did not drop Tiger like a bad habit over the past four months. Did it restructure his agreement to take down up-front risk in the event that he either prolonged his return or fails to perform upon his return? Probably. But they stuck with him. Interestingly, Tiger gear has been selling well as if nothing ever happened, and the golf market overall has definitely shown signs of picking back up after a long bottom. Though public perception is still very touchy at best, they’ll have much more in their back pocket to market him upon his return.


Is it any shocker that this was announced a day before Nike’s EPS? Probably not. In fact, we’d argue that given the 11.4% run in the stock over 4 weeks, it HAS TO pony up some solid numbers on results. The good news is that we think it will. We’re modeling $1.00 vs. the Street at $0.89. The biggest variance is on the top line, where we’re coming in at 8% versus the Street at 3.5%. Much of this is World Cup-related, which we do not think is appropriately accounted for in most models. 


If we’re off anywhere, it would likely be sales coming in 2-3% lighter, with that product showing up as higher inventories – again – due to World Cup. With Keith’s models suggesting that the stock is approaching a near-term overbought line of $71.17, we think that any result close to the consensus would jolt near-term enthusiasm, and give investors a shot at what we believe will be perhaps the best multi-year growth story in consumer/retail.


For our recent Back Book on Nike, please contact .


- Brian McGough



NKE: Tiger Adds to The Mo Mo - NKE 07 10 chart 3



NKE: Tiger Adds to The Mo Mo - NKE 04 07 chart 2



NKE: Tiger Adds to The Mo Mo - NKE 00 04 Chart 1


get free cartoon of the day!

Start receiving Hedgeye's Cartoon of the Day, an exclusive and humourous take on the market and the economy, delivered every morning to your inbox

By joining our email marketing list you agree to receive marketing emails from Hedgeye. You may unsubscribe at any time by clicking the unsubscribe link in one of the emails.