Into the market strength yesterday we bought the VXX and shorted the SPY.  With the VIX down -38% since the S&P500 bottomed -10.2% lower on Feb 8th, yesterday was a good time to buy some volatility for the immediate term TRADE from its oversold level.


Volatility (VIX) declined 4.4% 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 (16.90) and sell Trade (18.64). 


There was no obvious catalyst behind yesterday’s 0.58% move in the S&P 500, though there is a clear pick up in the RISK appetite and the REFLATION trade is gaining momentum.  The pullback in the dollar provided support for most commodities and commodity equities.  The Hedgeye Risk Management models have levels for the Dollar Index (DXY) at:  buy Trade (79.52) and sell Trade (80.31).


Riding the REFLATION trade were Materials (XLB) and Energy (XLE), and were two of the three best performing sectors yesterday.  Financials (XLF) rounded out the top three spots, with the focus on diminishing regulatory headwinds and capital needs.  Within the XLF, life insurance stocks were among the best performers.


Within the XLE, coal names led the index higher, with the focus on M&A after MEE announced that it would acquire Cumberland Resources Corp for $960M. The oil services group was another bright spot, with the OSX +0.8%.


Technology was a strong outperformer last week, but the XLK is unable to sustain the momentum this week.  The semis put in a strong showing with the SOX +1.2% yesterday, underpinned by strong fundamentals.  Industrials were also a relative underperformer, though the machinery space fared well after lagging earlier in the week. 


Yesterday, the Consumer Staples (XLP) and Consumer Discretionary (XLY) sectors finished higher, but were relative underperformers.  Retail also underperformed, although the S&P retail index finished higher for a sixth straight day.  Restaurant stocks continue to outperform on the back of some positive commentary in the QSR space - JACK +5.1%. BKC +3.1% were two notable standouts in the space. 


As we wake up today, equity futures are trading below fair value ahead of Feb CPI and as Greece pushes back into the spotlight as Germany is breaking ranks with the rest of the EU.  As we look at today’s set up the range for the S&P 500 is 27 points or 1.6% (1,148) downside and 0.8% (1,175) upside.


Today's MACRO highlight will be:

  • US CPI Core Index (February)
  • US Continuing Claims (6-March)
  • US CPI MoM (February) consensus 0.1%; ex-food/energy 0.1%
  • US CPI YoY (February) consensus 2.3%; ex-food/energy 1.4%
  • US Initial Jobless Claims (13-March) consensus 450K
  • US Current Account Balance (Q4) consensus ($119.8B)
  • Philadelphia Fed (Mar) consensus 17.6
  • US Leading Indicators (Feb) consensus 0.1% 

In early trading, copper is trading lower as the dollar strengthened on concern that Greece will fail to secure financial assistance from the European Union.  The Hedgeye Risk Management Quant models have the following levels for COPPER – Buy Trade (3.32) and Sell Trade (3.44).


In early trading Gold is trading sideways.  The Hedgeye Risk Management models have the following levels for GOLD – Buy Trade (1,110) and Sell Trade (1,137).


Oil is trading slightly lower on the back of a stronger dollar.  The Hedgeye Risk Management models have the following levels for OIL – Buy Trade (80.20) and Sell Trade (83.47).


Howard Penney

Managing Director














NKE: Tough to Poke Holes in This One, Folks

I debated writing a response to Nike's quarter, because I truly don't want to come across as being self-promotional. But I've gotten hit with a dozen questions over the past 40 min...So here goes...


The bottom line is that there's not a whole lot to say relative to our expectations.


1) But we said the company would earn a buck compared to the Street’s $0.89.  They earned $1.01.

2) We said it would largely come from a meaningful revenue beat. They printed 7% compared to the Street at 3.4%.

3) We said inventories looked tight, which bodes well for Gross Margins. They SMOKED the gross margin line with a 300bp kicker vs last year. (More than we thought)

4) In typical Nike fashion, they invested the upside. If they wanted to, they could have printed $1.15 how I’m doing the math (I’m glad they didn’t).

5) Constant dollar futures grew by 6% -- double the Street’s estimate.

7) Inventories were down by 13%.


Big caveat…My sense is that about 25min into the call, Don Blair will douse the excitement of many folks who love these numbers. They’ll come up with a reason to keep expectations grounded. They’re fans of Shakespeare at Nike…”Expectations are the root of all heartache.”



Bottom line is that they beat on revenue and gross margins with accelerating futures while inventories were down double digits. We’ve been touting this as our top pick for the last two months. This is not a one quarter story, and not a one year-story. But rather, this is the beginning of a 2-3 year run where Nike will meaningfully accelerate top-line growth due to structural changes that will facilitate a new ‘go to market’ strategy that will allow it to tack on another $8bn in revenue. Yes, with the stock acting so well over the past month, and now with squeaky clean results one can argue that this is known. But I’d argue against that. Faster money could care less about the bigger call, and many others out there (esp the sell side) like it for the wrong reasons, and are missing the really big call here.

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Question: Is China Selling Treasuries?

In the spirit of being transparent about our research process, I have decided to start showing more of the back and forth we have within our exclusive idea generating network. We have some very bright people who are transparent enough to tell us when they disagree with us and why. We are grateful for their trust. Hedgeye’s goal isn’t to be inflexible. It’s simply to be right.



On the topic of China selling Treasuries, this is what I wrote in the Early Look yesterday:


All the while, the Chinese are selling Treasury debt to the masses of people who are punch drunk at this global debt rock concert. Just plow it into whoever’s 401k that will take it as the Chinese sell it right back down our Congressional wind pipe.

China selling? Oh, no – they’d never do that, would they? I’ve said this enough times to be as annoying as Chris Dodd telling you he has it figured out this time, but please, for the sake of sobriety – please watch what the Chinese do versus what they say.


China was a net seller of US Treasuries for the 3rd consecutive month in January, selling another $5.8B net and taking its balance of America’s debt holdings down to $889 Billion.


That’s another $889 Billion reasons to ignore the reality that you can just “take me now but know the truth.” If we anger The Client (China) enough, rates are going a lot higher than your “exceptional and extended” Congressman’s sense of self is telling you.



Here was a response and ensuing debate between Hedgeye and a major Fixed Income PM from Massachusetts:


1. It is factually incorrect that they sold...they can buy out of London. Also, they extended out the curve to coupon bearing bonds instead of discount notes. A few months back the TIC data said they sold...but when more info came out, it turns out they were still the biggest net buyer....
most likely same thing happened here.


Hedgeye: Are you suggesting that its factually correct that they didn’t sell?


2. I am suggesting that other reports show they didn't.


Hedgeye: Well it sounds like no one can say, factually, that they didn’t sell – so I am going to go with what I see them doing every day, which is giving America the bird and reducing risk to her compromised financial system.


3. I’ll find where in report and send it to u when I get a chance. It is buried in the TIC data…


Hedgeye: ok, thanks - we looked there and didn’t come to the same conclusion, but this isn’t crystal clear and we may have missed something.


4. Let me is NOT factually wrong that the Chinese have sold. Net net it appears as though they have, although they could have purchases through UK custodian. there is no way of knowing who is buying all the USTs through UK custodian.

On the other hand, they have net added coupon bonds (us treasuries, as opposed to us bills) to the same tune as they have been buying for a while.

bills expiry > ust treasury buying = net "selling" that is apparent on the report (without being able to adjust for the potential to buy through UK custodian).

hope this helps.


Hedgeye: this is very helpful - thanks for taking the time to flag this. We need to do more work here and we will be back to you with anything incremental.


Keith R. McCullough
Chief Executive Officer



And that was a very ugly “bubble”


Yesterday, it was HOG  and today it’s PLCM…


According to today’s rumor mill, Polycom is in talks with Apax Partners over a deal that could take the company public.


The daily rumor mill is a scary reminder of 2007 and we know how that ended.  Unfortunately, with the FED keeping rates low for an extended period of time, the chance of this getting crazier before it’s over is very high.  Here is what we have so far – PLCM, HOG, HUN, RSH, WHR and GME are all stocks that have been in the rumor mill about some sort of buyout speculation. 


In the restaurant space, both Benihana and CKE Restaurants have recently announced bids on the table.  Adding to the “noise,” the New York Post reported last week that Nelson Peltz was considering a counter bid for CKR. 


The following is a list of restaurant companies that could be on the A list for a private equity transaction and/or for becoming victim of the rumor mill:




In compiling this list, we are trying to avoid waking up one day to a “potential” short up 10% on “buyout” rumors.  While it may be easy to take issue with the fundamentals or potential valuation of any of these names, what you can’t deny is that all of these companies have very little funded leverage and generate substantial free cash flow. 


Howard Penney

Managing Director


Good news is good; bad news is taken with a grain of salt.


Yesterday, Starbucks was upgraded to buy from neutral on a “sales and profit momentum” call that will not end.  At 10x NTM EV/EBITDA, SBUX is looking expensive but fundamentals are strong.  I agree with the “call” behind the upgrade, but think the analyst is just a little late to the party.


Sonic was also upgraded to overweight from underweight; Cheesecake Factory downgraded to underweight from neutral and Brinker downgraded to underweight from neutral. 


Yesterday’s score care looks this:


  • SBUX up 3.6% on a 125% increase in its 30-day average volume
  • SONC up 5.6% on a 274% increase in its 30-day average volume
  • EAT down only 0.5% on a decline of 11% in its 30-day average volume
  • CAKE down only 0.1% on a 27% increase in its 30-day average volume


Today, JACK was upgraded to buy from neutral and the stock is currently trading up 5.6% on strong volume.


I can’t comment on the legitimacy of the analysts who are making these “calls”.  What seems obvious is that there are no willing sellers on “bad” news, but the buyers show up on good news.  The current economic environment is having an outsized impact on QSR over FSR and that is now clear to everyone.


What is uncertain is when that tide will change.  The most obvious signal will be when the Casual Dining industry believes that the economic climate is strong enough for the major industry players to start growing units again.



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