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UA/NKE and AMZN: Things are Changing

Three interesting callouts after a 'post daylight savings time' morning of online checks and research...

 

1) The rate at which Zappos is growing out its apparel offering is notable. Pay attention there. One of the few things that can stun growth there is internet taxation (like we saw in Texas two weeks ago). Separately, Amazon's apparel has been atrocious in the past. It's still nothing to write home about. But better on the margin? Definitely. Are we at a point yet where the two combined are 1+1=3? We're note sure. But the tail risk here for the rest of retail is that one day everyone wakes up and realizes that 1+1 now = 5. 

 

2) In looking through athletic apparel, it jumped out immediately that Nike has made a major push with performance apparel at Zappos. 710 out of the 7384 items on the site are Nike.  That's just shy of 10%. Under Armour's share? 0%. That means one of three things -- either a) AMZN/Zappos is not buying UA bc customers don't want it, b) Nike's push into getting apparel right and getting it into Zappos as a new channel partner came with a 'no Under Armour' inclusion in the implied agreement, or c) UA has simply chosen to not go there yet. Sounds to us like it is the latter.

 

3) Similarly, looking at shoes, Nike has 459 of the 2910 shoes currently on the site. Under Armour? 0.  Granted, UA is just starting its push into footwear, and Zappos is hardly in the relm of the aspirational retailers to showcase the brand as it launches. But the bottom line is this channel is there for the taking for the Armour.

 

This does not change our tune on UA (the stock)? No.  Simply put, the 2-3 year opportunity is enormous, and this company will continue to print 20%-30%+ ORGANIC top line growth through 2012. But consensus estimates for next year have finally come up to our level, and two new risks have entered the equation -- a) a meaningfully upped ante chip for athlete endorsements, and b) cotton prices in the stratosphere at the same time UA is making a push into a new line of cotton-based product (ie it has never had a process around managing cotton risk, and this is a heck of a time to develop one).  

 

Bottom line...We love the brand, really like the company and how it's progressed along its maturity curve, but we don't like the stock.

 

UA/NKE and AMZN: Things are Changing - 2


MCD – OCTOBER SALES PREVIEW

McDonald’s is scheduled to report its October sales numbers before the market open on Monday, November 8th.  October had one less Thursday, and one additional Sunday, than October 2009. Based on this, I would expect a similar impact to that felt in January 2010 (-0.4% to +1.0%), varying by area of the world) which also had one less Thursday and one additional Sunday than the January prior.

 

In every region of the world, consensus estimates are calling for a significant slowdown in two-year average sales trends from September levels for MCD.  On a relative basis, a 5%+ in global same-store sales still suggests that MCD is continuing to take market share.  

 

Below I go through my take on what numbers will be received by the street as GOOD, BAD, and NEUTRAL, for MCD comps by region.  For comparison purposes, I have adjusted for calendar and trading day impacts.  To recall, September same-store sales numbers showed improvement across the board.  While Europe and APMEA had been soft in August, they rebounded strongly in September.  The U.S. saw more marginal improvement.  In October, MCD needs to post impressive numbers in order to maintain the performance seen in September.  Expectations are likely muted, and I would expect some leeway to be given in terms of how investors view the results. 

 

 

U.S.  - Facing an easy -0.1% compare (including a calendar shift which impacted results by +1% to +1.7%, varying by area of the world):  As of today, the street is estimating a +6.1% comp in the U.S.  Based on our checks, the slowing sales of smoothies and Frappes will negatively impact same-store sales by 1-2% versus September.

 

GOOD: A print of 8% or greater would be perceived as a good result because it would imply that the company was able to maintain two-year trends close to those seen over the summer months.  While usually I look for an improvement in calendar-adjusted two-year average trends, and an 8% print would imply a significant slowdown from September, it is important to note that a +8% comp would be the strongest print since February 2008.  This may sound slightly unrealistic to some, but given the especially easy comparison of -0.1% from October 2009, it seems like it could be in play.

 

NEUTRAL: Roughly 7% to 8% implies two-year average trends that are approximately between 23 bps and 73 bps below the calendar-adjusted two-year average trends seen over summer and considerably below those seen in September.  However, given that a 7% print would still be 73 bps above the highest same-store sales number seen this year, in July, investors would likely view this as a neutral number.  

 

BAD: Below 7% implies that two-year average trends deteriorated sharply on a sequential basis from September.  Given that the U.S. was the only market to maintain sequential two-year trends over the last three months, a sharp drop off of the magnitude that a 7%-or-lower result implies would be received negatively (though it is important to remember that the current consensus estimate falls in this range).

 

 

Europe (facing a difficult 6.4% compare, including a calendar shift which impacted results by +1.0% to +1.7%, varying by area of the world):  As of today, the consensus estimate is for Europe to post +4.2% same-store sales growth.

 

GOOD:  A print of 5.5% or higher would be viewed positively because it would imply two-year average trends slightly below those seen during September in Europe (after accelerating sharply from August levels).  This would be the highest print since May.  Additionally, given the strong performance in September, investors will be watching to see if two-year trends maintain a level above 5% or have since moved lower towards the soft two-year trends in August.

 

NEUTRAL: A result of 4.5% to 5.5% would imply that sequential trends decelerated from the strong performance in September but maintained a level above those seen in August.   

 

BAD:  Less than 4.5% would imply, approximately, a 100 bp deceleration in two-year average trends from August.  Additionally, two-year average trends would fall below 5% which, with the exception of August, has not happened since February 2010. 

 

 

APMEA (facing a 4.7% compare, including a calendar shift which impacted results by +1.0% to +1.7%, varying by area of the world):  As of today, the consensus estimate is for APMEA to post +5.5% in same-store sales growth.

 

GOOD: 8% or higher would imply a slight acceleration from the results seen in September (after slowing in August).  Following the strong print in September, it will be interesting to see if performance in the APMEA region was maintained from the third quarter into the first month of the fourth quarter.   

 

NEUTRAL: Between 7% and 8% would imply two-year average trends roughly in line with those seen in September.  While the midpoint of this range implies a slight deceleration, it is unlikely to concern investors too much given the strong rebound in September sales in the APMEA region. 

 

BAD:  Below 7% would imply a significant slowdown from the two-year average trend in September and a return to the level of two-year average trends seen in August, which was a lackluster month for MCD APMEA.

 

MCD – OCTOBER SALES PREVIEW - mcd ranges

 

Howard Penney

Managing Director


EMPLOYMENT DATA POSITIVE AGAIN FOR QSR

Conclusion: October’s employment data from the BLS shows a growth in the employment level for 20-24 year olds for the third consecutive months.  This is incrementally positive for QSR stocks. 

 

Unemployment data released this morning by the Bureau of Labor Statistics were again positive for Quick Service restaurant stocks. Management teams in quick service and casual dining have been citing unemployment levels, particularly among younger age cohorts, as a particularly strong headwind for the restaurant industry. 

 

The most recent data from the BLS, for October, reveals that 20-24 year olds saw a year-over-year uptick in employment levels for the third consecutive month.  The improvement seen in August was the first since September 2007.  As the chart below clearly shows, the improvement in employment levels for 20-24 year olds appears to be growing at an increasing rate. 

 

EMPLOYMENT DATA POSITIVE AGAIN FOR QSR - unemployment by age black

 

Howard Penney

Managing Director


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PRESSURE AND TIME

This note was originally published at 8am this morning, November 05, 2010. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“Oh, Andy loved geology. I imagine it appealed to his meticulous nature. An ice age here, million years of mountain building there. Geology is the study of pressure and time. That's all it takes really, pressure, and time.”

-Red, The Shawshank Redemption

 

On a daily basis, we grind through a constant channel of noise.  E-mails, instant messages, text messages, Bloomberg messages, and phone calls all can interrupt our train of thought.  Generating valuable investment ideas for our clients in real-time requires pressure (effort) and time (focus) so at Hedgeye we value the time we take away from the various stimuli that surround us for so much of the day so that we can share ideas across sectors, discuss ideas with clients, or simply think in solitude.  As Keith referenced in his Early Look titled, “AMERICAN SOLITUDE” last week, solitude and leadership often go hand-in-hand. 

 

That said, I think I can speak for everyone at the firm when I state that the unique nature of our business model offers valuable dialogue channels with our clients.  The nature of that dialogue can vary broadly, agree or disagree, angry or calm, data based or pure qualitative opinion.  The fact is, all of it is critical to our process and all of it is appreciated. 

 

Besides the wide array of views we receive from our exclusive network, the disparate perspectives of our readers are also a key differentiator for our firm.  We hear from people managing billions and we hear from people managing a few thousand from their bedroom. 

 

While I am sensitive to the trust our clients have in us, I think it is important to highlight one of the more powerful thoughts that have come across our screens lately:

 

“What is the relatively small retirement investor to do?  He is long stocks--that is what has been taught to him over 80 years.  He is long on American patriotism and innovation.  He is disgusted with American politics.  He is naive on currencies, trade, global economics and the bigger picture.  He has income investments that he needs to pay the bills.  He lives in fear of the next bubble bursting.”

 

The reason why I think this thought is powerful is that it highlights a lot of the ideological dogmas that shackle people’s investment perspectives.  That is not a criticism, and I am not claiming to be immune to the influence of emotion or groupthink.  The best one can do is to be aware of it.  The above thought highlights several handcuffs that need to be removed in order to hold as dispassionate and lucid a view of the markets as possible. 

 

1)      American Patriotism, while admirable, should not be confused with American Delusion.  I love my country (Ireland) as much as the next man.  Thinking critically, especially about government and the path of the country, is a necessary feature of a democracy.

2)      American innovation is not what it used to be.  Some in the media may pine for the days when auto stocks used to “double and double” as soon as “they get going”, but this theme doesn’t sit well with our data-based conviction that Jobless Stagflation (inflation accelerating, growth decelerating) is here to stay.

3)      Currencies, trade, global economics and the bigger picture are all part of the same patient that we examine each day.  Interconnected markets are here to stay.  We strive to fully respect that fact in the positions we hold in the Hedgeye Virtual Portfolio; we are short the Euro and long the Dollar, while being short the S&P 500.

 

The last sentence of our client’s message is powerful.  Living in fear of the next bubble bursting is certainly a powerful engine driving market sentiment.  Whether it’s the “relatively small retirement investor” that “needs to pay the bills” or the banker that wants to get paid at year end, fear is a very persuasive mechanism.  In the end, we are as grateful to hear the perspectives of our individual investors as we are to hear the views of our most successful PM’s. 

 

In Ben Bernanke’s op-ed in the Washington Post, published yesterday morning, he writes that the dual mandate of helping promote increased employment and sustain price stability compelled the FOMC to announce its intention to buy an additional $600 billion of longer-term Treasury securities by mid-2011. 

 

The introduction to his piece refers to the actions taken by the Federal Reserve and other governments to “stabilize” the crisis in 2008 with a clear aim of claiming legitimacy for further quantitative easing in 2010.  In that same vein, I would refer to the uselessness of past forecasts by government employees like Bernanke and Christina Romer, former chairwoman of President Obama’s Council of Economic Advisers (remember the prediction of 8% being the “peak” of unemployment?).  When Keith coined the term Quantitative Guessing, he was not being flippant; these people do not – and cannot be expected to – offer anything more than guesswork in their economic forecasts. 

 

What does not involve guesswork is the monitoring of real-time market prices.  The impact of QE2 on the markets is clear to see in the data.  As the dollar has declined, oil, gold, corn, cotton and many other commodities have seen parabolic moves to the upside.  The jobless claims numbers yesterday underscore the dire circumstances that America’s unemployed find themselves in.  The actions of the Federal Reserve are not even close to meeting the expectations that the government set.  With respect to the “dual mandate” of the Federal Reserve, it is failing on both counts.  The consumer is experiencing inflation and job growth has been rather disappointing.

 

An intuition exists among the American public that I am convinced is lost on many inside the beltway in Washington.  The 401(k) is a significant depository of wealth for the American people so the fear of the “relatively small retirement investor” is understandable.  That investor can see and hear the realities of the economic situation.  The realities of the economy are all around for us to see - 43 million people on foods stamps and growing; a foreclosure crisis that shows no signs of abating and will likely get worse before it gets better.  Investing under a cloud of fear of the bubble bursting is exactly the kind of position we do not want our clients to be in.  In the end, all it will really take for the “Bernanke Bubble” to burst is pressure and time

 

In The Shawshank Redemption, the result of Andy Dufresne’s meticulous application of pressure and time resulted in him burrowing out of a prison over a twenty year period using only a small rock hammer.  As those of you who have seen the movie will remember, the prison warden was shocked to say the least.  Pressure, sustained by time, can work both ways.  In 2010 America, the pressure is being provided by a broken political system, government-sponsored inflation, and a merciless devaluing of the dollar.  All else that is required is time.

 

One thing is for sure, we will not be complacent.  The last thing we want to do is look like the warden of Shawshank when he realized what had become of Andy Dufresne.  As you can see in the chart below, the VIX Index has traded below its 15 year average.  Being bearish at this point is not consensus and we are down 2.18% on our short position in the S&P 500.  Yesterday’s move was significant but our conviction has not wavered that the largely policy-induced pressure building inside the market is reaching a critical point.

 

Time is ticking and pressure is growing.

 

Have a great weekend,

Rory Green

 

PRESSURE AND TIME - vix chart


The Week Ahead

The Economic Data calendar for the week of the 8th of November through the 12th is full of critical releases and events.  Attached below is a snapshot of some (though far from all) of the headline numbers that we will be focused on.

 

The Week Ahead - cal1

The Week Ahead - cal2


Buck Breakout? US Dollar Levels, Refreshed

POSITION: Long US Dollar (UUP), Short Euro (FXE)

 

If you are in this game for real, you will get run-over. I did for three days this week. Lessons were learned.

 

Three days, fortunately, does not a career in risk management make. The best you can do after you get yard-saled at center ice is to pick up your teeth, go back to the bench, and get ready for the next shift.

 

We did that yesterday. We shorted the Euro and bought the US Dollar Index. Yes, these are immediate term TRADE calls. But, remember, all TRENDS start as TRADES. It’s the job of the macro story teller to outline why the direction of price momentum can continue.

 

Dollar DOWN and Euro UP – are you kidding me?

 

No.

 

Don’t forget that only 7 months ago, when the Street was parroting their “Euro Parity” call, we went the other way. Currencies are baskets of one another. The US Dollar can go up if the Euro starts going down – sometimes it’s that simple.

 

Why could the Euro go down? Well, re-print any Euro “parity” sellside research that’s 6 months old and you’ll have plenty of reasons – it’s all associated with sovereign debt default risk and, as of the last few weeks, European CDS and sovereign yields (selectively) are at a bare minimum flashing amber lights.

 

How about Euro PIIGS printing moneys? QE-EU? Part Deux? Every central Fiat Fool for dem-self, eh.

 

The other 3 reasons why the US Dollar could continue higher in the immediate term are: 

  1. Mean Reversion
  2. G-20 meetings in Korea next week
  3. Obama on a 10 day roady w/ Asians who are right p.o’d 

Oh, and dare I mention that little critter that’s ruined pretty much every emerging market at some point in human history – inflation. That’s a catalyst too.

 

The immediate term TRADE support line for the US Dollar Index is in the chart below (right where we bought it yesterday). Immediate term TRADE resistance is up at $77.08. In other words, the USD could easily put on a +2.2% mean reversion TRADE to the upside and nothing will have changed the quantitative setup.

 

A breakout above $77.08 puts the $80.46 range in play. If you were to only ask Mr. 10 and Mrs. 30 year US Treasury Yield what they think about that, they’d agree. Like the “parity” call of 6 months ago, let the storytelling about how Bernanke will never allow the currency of the American citizenry to survive begin.

 

Macro musings from a man who is nursing his black eye, but with all 10 of his bare knuckles intact,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Buck Breakout? US Dollar Levels, Refreshed - USD index 6 months


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