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TGT: Big TREND Support

Fundamentally, TGT is in our penalty box, as noted earlier. But based on initial trading, it's oversold according to Keith's models.

 

"Big TREND line support here – stock down on the Scovaner news is a buy more" KM


TGT: Our Take On Scovanner

 

Conclusion: Any way you slice it, this puts Target in the penalty box.

 

 

This definitely puts TGT in the penalty box for us – for so many reasons…

  1. This was sudden. He’s been on the conference/double secret 1-on1 circuit over the past quarter. To do so knowing he was on his way out would have been uncharacteristically and unacceptably misleading.
  2. Scovanner was clearly the faceplate of the company to Wall Street, and has been for the better part of 10-years. There’s no clear successor yet.
  3. With Francis (25-year veteran) leaving to JCP last quarter, we’re now looking at two of the most seasoned executives at the company stepping down over 90 days.
  4. Both of these gentlemen collectively were charged with fixing EVERY major intermediate-term issue plaguing this company.
  5. Does anyone really think that they won’t sweep every little item under the carpet and shore up every accrual and blame it on him/them? Better yet, that’s so tough to do quickly on such a big balance sheet. This could take a few quarters.
  6. Even if the company puts up good numbers over the short term (as they’ve been doing), there’s big enough uncertainty that people will not give TGT the benefit of the doubt.
  7. This is precisely the wrong time of year for this to happen to TGT. Conversely, it’s great for Wal-Mart, and perhaps even KSS.


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Golden Handcuffs

“You know what it is? It is a golden handcuff, with the keys thrown away.”

-O. Henry

 

Keith and I are in San Francisco with our colleague, and one of the top young institutional salesmen in the business, Bill LeClerc, visiting some of our current and prospective subscribers. (We may also stop by the Googleplex for a quick game of roller hockey if Sergey and Larry accept the Hedgeye challenge.)  Having covered technology in the late 1990s and early 2000s, I know full well that there is something special about San Francisco, and I’m reminded of that on every visit.

 

Coincident with this visit, I’ve also been reading “Steve Jobs” by Walter Isaacson.  The story of Steve Jobs, and the creation of Apple Computer, is, in many ways, emblematic of the last thirty some years of business history in Silicon Valley.  Plenty of time has been spent rehashing Jobs’ incredible career and personal quirks, but I wanted to highlight one interesting quote from the book, which is as follows:

 

“Rod Holt, who had built the power supply, was getting a lot options and tried to turn Jobs around.  “We have to do something for your buddy Daniel, he said, and he suggested they each give him some their own options. “Whatever you give him, I will match it,” said Holt.  Replied Jobs, “I will give him zero.”

 

Now, I’m not about to psychoanalyze Steve Jobs, but I did find this excerpt interesting.  The Daniel in question, was Daniel Kottke, who was a college friend of Jobs and one of the first employees of Apple.  Unfortunately, Kottke wasn’t a high-enough level employee to be cut in on the option pool pre-IPO and Jobs, in a very dispassionate manner, wasn’t willing to make a “charitable” exception.  To Jobs, it seems, there were no free lunches.

 

Like global macro markets, Steve Jobs waited for no one.  At times Job’s personal drive was seen as extreme and insensitive, yet his success in innovation is difficult to compare.  As is widely known, Jobs was Buddhist, a long time vegetarian, and for much of his early career only showered once a week.  Despite these somewhat “liberal” tendencies, he created all of his businesses without the Golden Handcuffs of government intervention.

 

This morning we are seeing the downside of reliance on the Golden Handcuffs of government intervention.  Currently, major European equity markets are down across the board from -2.5% to -4.0%.  Leading the charge are Italian and Greek stock markets, down -5% and -6%, respectively. In terms of sectors, the European banking sector is at the forefront to the downside, with the major French banks down close to -10% across the board.

 

Certainly, this is crazy equity price action given that it seems like just yesterday that Europe was bailed out and saved from the sovereign debt contagion.  Well, actually it literally was yesterday, or at least late last week.  From the outset, we were suspicious of the Bazooka press release.  As Keith wrote last Thursday:

 

“In the end (and, in the end, this will not end well), I don’t think this concept of Bazooka Light will make a lot of sense to anyone who takes a deep breath and actually reads what it implies.

 

The timing and size obviously matter – but the timing (end of November? is subject to a hefty political debate) and the size is basically whatever the Europeans want the media to buy into the headline being.”

 

This morning the key question seems to relate to timing as there is news out that the Greeks will hold a referendum on the EU debt deal, most likely in the December / January time frame – along with a confidence vote on the government in the coming days.  It seems the Greek people, who according to reports yesterday have more Porsche Cayenne’s registered than tax payers making over $50,000 per year, want to take their time and think about the bailout.  Personally, I would probably want to think about the Golden Handcuffs before I put them on as well.  But as I noted above, global macro markets wait for no one.

 

In the Chart of the Day below, we’ve also flagged the widening spreads between Italian government bonds and similar duration German Bunds.  As of this morning, this spread is literally as wide as it has ever been.  Certainly, Greece is one thing, but Italy is the eighth largest economy in the world with debt-to-GDP at north of 120%.  Unfortunately, for those looking for good news, this widening of Italian yields is signaling that things are going to get worse before they get better in Italy.

 

To add insult to injury, we are receiving PMI measures this morning that are foreshadowing a further deceleration of growth in Europe. Specifically, Chinese PMI for October came in at 50.4 versus the estimate of 51.8 and U.K. PMI came in at 47.4 versus the estimate of 50.0.  Tomorrow morning, the rest of European PMIs are released. Stay tuned.

 

Mr. Draghi, welcome to the ECB!

 

Keep your head up and stick on the ice,

 

Daryl G. Jones

Director of Research

 

Golden Handcuffs - Chart of the Day

 

Golden Handcuffs - Virtual Portfolio


THE HBM: DNKN, THI, BWLD

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Commodities

 

While coffee prices gained over the same timeframe, world coffee exports rose 9.4% in 2010-2011, according to the International Coffee Organization.   This is a bullish signal for demand.

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: DNKN, THI, BWLD - subsector fbr

 

 

QUICK SERVICE

 

DNKN:  Dunkin’ Brands posted Q3 EPS of $0.28 ex-items vs Reuters $0.25.  The company got to the $0.28 number when adjusting for a $14.7m sponsor termination fee and $7m amortization of other intangible assets charge.  Dunkin’ Donuts US comparable store sales growth was +6.0% versus SA Consensus of +3.3%.  The company also announced a secondary offering of 22 million shares.

 

THI: The National Hockey League today announced a deal with Tim Hortons that gives the quick-service chain title sponsorship of the 2012 NHL All-Star Game in January -- a move that will likely ease the path for other leagues who are exploring presenting or title sponsorship deals for their marquee events.

 

 

CASUAL DINING

 

BWLD: Buffalo Wild Wings announced the opening of its 800th restaurant nationwide with the simultaneous opening of restaurants in Florida, Tennessee, Washington and California.

 

THE HBM: DNKN, THI, BWLD - stocks nov1

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst


Bazooka-Light

This note was originally published at 8am on October 27, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The emotions aren't always immediately subject to reason, but they are always immediately subject to action."

-William James

 

If you gave me the written press release with what imprecisely this European band-aid actually says, I would have stayed short the SP500 (SPY) yesterday. That would have made me really wrong.

 

Rather than talking about what I would have, could have, and should have done, here’s what I did yesterday – and therefore where I stand for this morning’s emotional market open (Time Stamped):

 

------ 

10/26/11 11:33AM EDT

Booking It: SP500 Levels, Refreshed


POSITION: Long Consumer Discretionary (XLY), Short Consumer Staples (XLP)


After a 30 handle drop in the SP500, I’m booking it.

 

That doesn’t mean I’m bullish. It doesn’t mean I’m bearish. It doesn’t mean I can’t re-short it either. It just means that we’re holding my most immediate-term TRADE line of support at 1217.

 

Across our 3 risk management durations, here are the lines that matter most: 

  1. TAIL = 1266
  2. TREND = 1254
  3. TRADE = 1217 

So the intermediate-to-long-term picture still supports selling all rallies that extend themselves toward 1254-1266. And, until the immediate-term TRADE is no longer bullish (1217 support), I’ll respect whatever it is that the market sees coming next. As the Keynesian central planners have proven in the last 3 weeks, anything can happen.

------

 

And then… here’s what the Europeans did:

 

“The world’s attention was on these talks… We Europeans showed tonight that we reached the right conclusions.”

-German Chancellor Angela Merkel

 

And then… here’s what Global Macro markets started doing (which is what led Merkel to stating she has this right, for another day?):

  1. China was up small (+0.34%) and up for the 4thconsecutive day but, like the Hang Seng, remains bearish TREND and TAIL
  2. Japan was up +2% and the Nikkei remains below its intermediate-term TREND line of 9219 resistance
  3. Indonesia, Singapore, and Thailand were all up +2-3% on the squeeze, but all 3 failed to traverse their respective TREND lines
  4. Germany’s DAX is having the most impressive move, scaling slightly above its 6221 TREND line resistance (bullish if it holds)
  5. France’s CAC is up big but failing to eclipse its TREND line of resistance = 3411 (TAIL resistance for the CAC = 3889)
  6. Greece’s ATG Index is up over +3% and actually moved above its immediate-term TRADE line (784) for the 1sttime in 6 months
  7. CRB Commodities Index remains bearish TREND (327) resistance and bearish TAIL
  8. WTIC Oil has recovered its TREND line of $88.57 support, but remains a bearish TAIL (resistance = $93.87) after failing there
  9. Copper has recovered TRADE line support of $3.36/lb but remains bearish TREND ($3.90/lb) and TAIL
  10. Gold is back to bullish TRADE ($1671) and TREND ($1701), which makes sense post the biggest fiat bailout in world history
  11. 10-year US Treasury Yields have rallied from TRADE line support (2.04%) but failed to recover TREND line resistance (2.40%)
  12. Yield Spread (10s minus 2s) is +8 basis points wider day-over-day to 197 bps wide, well off the all-time high of 293bps wide in FEB
  13. US Dollar Index is holding TREND and TAIL lines of support of $75.37 and $75.77, respectively
  14. Euro is ripping the shorts right back up to the TAIL and TREND lines of resistance at $1.40 and $1.42, respectively
  15. My inbox and twitter streams are jammed with, “shouldn’t I cover… we could go a lot higher”

So, what do you do with all of this? If you are me, today you probably do a lot of nothing. When I worked for other people, that would not be a tolerable answer – we “smart” hedge fund people always have to do something…

 

Or do we?

 

In the land of chasing short-term returns, emotion is not often subject to reason. But very often it is “subject to action.” That’s mostly what I see going on here this morning and, effectively, why I have turned down offers to run Global Macro books for other people for the last couple of years. Been there, done that – and I don’t need to do things in life that I don’t think make sense.

 

In the end (and, in the end, this will not end well), I don’t think this concept of Bazooka Light will make a lot of sense to anyone who takes a deep breath and actually reads what it implies.

 

The timing and size obviously matter – but the timing (end of November? is subject to a hefty political debate) and the size is basically whatever the Europeans want the media to buy into the headline being.

 

It’s all theoretical multiples of leverage on the agreed upon EFSF baseline number. Obviously that’s the best way to threaten the shorts – remind them that you may not have any money, but that you can have lots of money if you print other people’s money and lever it up!

 

Mechanically, since the ECB and IMF have not formally engaged in backstopping any of these concepts of theoretical leverage, this is what happens next (in this order):

  1. Insolvent European banks have to try to raise capital in the public markets (good luck)
  2. If that doesn’t work, then they have to tap their national government (most of whom are tapped out)
  3. If that doesn’t work, tapping the EFSF is considered “last resort”

In other words, this keg of Bazooka Light will be tapped, then kicked… then the 2008 post TARP (October-November 2008) price volatilities begin.

 

My support and resistance ranges for Gold, Oil, German DAX, and SP500 are now $1701-1729, $88.57-93.87, 5829-6221, and 1226-1266, respectively. Emotional decision making today will be epic.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bazooka-Light - 1. chart

 

Bazooka-Light - Virtual Portfolio


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