JCP: Buh-Bye



The JCP print was yet another event boosting our confidence that there is a severe duration mismatch between expectations for most institutional investors vs. Activists, vs. Management. We think that understanding the different durations is especially important with JCP given that it is a reasonably well-hated name (22.4% of the float is short) in retail with management incrementally investing capital into the model to transform the business.


In other words, the Street is beating up the company for doing the right thing. Usually, we love stories like this, as they tend to lead to share gain and margin growth on a disproportionately smaller operating asset base. This was RL, LIZ, NKE, to name a few. And yes, we think that it will ultimately be JCP as well.


But as we’ve been saying since our July 28th Black Book (JCP: What the Ackmanists are Missing), before JCP becomes the best stock in the S&P, it’s likely going to be the worst stock in the S&P. The company is investing today to make changes. But as Johnson openly states, he needs to completely overhaul this company to make it ‘America’s Favorite Place to Shop.’  JCP has bad real estate where it is captive to mall traffic, below-average brands, very little pricing power despite its clout – even at the factory level given its near-vertical positioning, and a competitor in KSS that simply has better stores in just about every way, and as of this year reached 50% overlap with JCP as it relates to footprint (stores within a 5-mile radius).


Valuation Considerations

Unless you are blessed with a mandate to Outperform over a 7-year time period (like Ron Johnson is), the biggest thing to consider with valuation is that it takes a distant back seat to actually understanding what the earnings levers are, and how and when the company gets there.


Let’s look at them over several durations.


TRADE (3-Weeks or less): JCP’s 4Q guidance is absolutely not a slam dunk. With Ullman getting up there and saying that comps will be flat to positive slightly and GM% will be flat to down slightly after six quarters of inventory growing an average of 5% faster than sales – we can’t simply give this company a free pass there. Here’s another consideration, in looking at year/year discretionary spending, over the past six months we’ve had a positive influx of 4-5%spending in non-essential categories on the part of the consumer. For the next five months – barring a collapse in oil or the unemployment rate – we’re looking at -2-3% yy. That’s a -5% sequential turn, and like most retailers, there’s very little chance that JCP can avoid this. We’re still shaking out below $1 in EPS assuming a 2% decline in comp compared to the company’s guidance of $1.05-$1.15 in Q4.


In the end, it’s easy for Ullman to throw out targets to the Street…because he won’t be on the call in January to defend why he missed.


TREND (3-Months or more): Ron Johnson will be coming out of his protective shell in late January at an analyst meeting in New York. That’s where he’ll roll out his strategy for reinventing the company. We can’t imagine that people will walk away uninspired…but we also think that this is the market expectation right now. One thing that RJ cannot do is roll out his plan without telling everyone how much it will cost. That’s when we think there will be sticker shock.


Do we know the dollar amount? No. But in adding up all of what we think is deferred maintenance over time, we can get to a number anywhere between $1-3billion. I realize that’s a range wide enough to drive a truck through. But the reality is that he’s going to pick a number he thinks he needs, and then he’s going to gross it up to a number that he wants. There’s a difference. Again, his $50mm in warrants get him paid based on what happens 7-years out. He’ll has a free pass with the Board  to take a whack out of CASH earnings (every $1 billion is $2.50 per share) to get the company to a best-in-class retailer.


Some will argue that people will look through any special charges. We disagree. Remember that Johnson has absolutely no problem disappointing the shorter-term agenda on the Street – as was the case in his early days at Apple – in favor of building long-term value.  While we’ll be the first to admit that this is the right thing to do, the reality is that this is a MAJOR execution story, and there will be bumps and bruises along the way. Earnings will matter, and it will be tough to simply ‘look through’ such big items. All honeymoons must end at some point. Eventually, Johnson will not be viewed as ‘the guy from Apple,’ but rather ‘the guy at JCP.’


TAIL (3-Years or less): This is one where the TREND meshes with the TAIL, as the announcements will be near-term, the execution will be intermediate-term, and the results will be long-term. The problem here is that JCP’s definition of long-term is 7-years. Over ‘3-years or less’, which is our long-term duration, JCP is still likely to be in execution mode. It is unlikely too see any of the real benefits of Johnson’s actions until after 2015. In other words, it’s a long time away…


 JCP: Buh-Bye - JCP vs. KSS Overlap





Brian McGough

Managing Director


European Risk Monitor: Heads Will Roll

Positions in Europe:  Short EUR-USD (FXE); Short France (EWQ)

Crowds cheered the news of Italian PM Silvio Berlusconi’s resignation and Mario Monti’s appointment on Saturday, however let’s not forget what’s left in the balance—public debt at 120% of GDP; pushback on austerity that will not help to curb the deficit; a technocrat government in which new elections aren’t scheduled UNTIL early 2013; debt maturities north of €200 Billion over the next 6 months; poor growth prospects that should result in declining tax revenue; worries about core Italian bank leverage to European sovereign paper; rising government bond yields increasing the cost to raise capital; and market participants looking for a quick fix to Italy’s (and the rest of Europe’s) problems with a quick flick of the wrist.


The Italian economy and more broadly European capital markets are going to need Super Mario to save the day—well frankly, we don’t think Mario squared (+Mario Draghi) can save the day. Don’t forget that we don’t have any major planned catalysts into year-end around which Europe’s unanswered questions: expansion (leverage) of the EFSF, bank recapitalization, Greek haircuts will be solved for.


Talks that China would come to Europe’s rescue have faded—not surprisingly given the less obvious benefit to them—and the expansion of the role of the ECB and IMF are still undecided.


Today, at her Christian Democratic Union party’s annual congress in the eastern German city of Leipzig, German Chancellor Angela Merkel told leaders they must create a “new Europe” by deepening ties in the 27-nation EU, yet reiterated her rejection of jointly sold euro bonds.


She said:  “The task of our generation now is to complete the economic and currency union in Europe and, step by step, create a political union… It’s time for a breakthrough to a new Europe…  If the euro fails, Europe fails.”


In response, we don’t want to discount the resolve of Eurocrats to maintain the Eurozone project—after all the last two years have proven this out well—however we do want to sound the horn that the credit markets are telling a very different story around the risk of this very project.  And more rhetoric without action is going to see investors punish most European capital markets.


Our weekly European Risk Monitors are included below. We remain short the EUR-USD via (FXE), which remains broken TRADE ($1.37), TREND ($1.42), and TAIL ($1.40), and short France (EWQ) in the Hedgeye Virtual Portfolio. For more specifics on both positions, see our recent work on the Hedgeye portal.



European Sovereign Yields – European 10YR yields were mostly higher last week. Greek yields shot up 228bps, Spain +44bps, Italy +35, while Portugal declined -62bps and Germany -12bps. As always, we’re keying off the 6% Lehman line as a critical breakout line. Italy has held tight above the 6% for the last three weeks, currently at 6.57%.


In its SMP bond purchasing program, the ECB bought €4.5 Billion in secondary bonds last week (vs €9.5B in the week prior), taking the total program to €187 Billion. Look for Super Mario (Draghi) to increasing buying alongside heightening Italian yields.


European Risk Monitor: Heads Will Roll - 1. me


European Sovereign CDS – European sovereign swaps mostly widened last week. Spanish sovereign swaps widened by 7% (+28 bps to 427) and French by 11% (+20 bps to 202). 


European Risk Monitor: Heads Will Roll - 2. me


European Risk Monitor: Heads Will Roll - 1. x


European Financials CDS Monitor – Bank swaps were wider in Europe last week for 32 of the 40 reference entities. The average widening was 6.2% and the median widening was 11.5%.   The German bank Bayerische Hypo- und Vereinsbank saw swaps widen by almost 30%. In addition, the four Italian banks we track saw swaps widen an average of 18%. 


 European Risk Monitor: Heads Will Roll - 3. me


Matthew Hedrick

Senior Analyst

Bearish TAIL: SP500 Levels, Refreshed



My position on the long-term TAIL being broken is, at a bare minimum, consistent.


So is my process. I run a core 3-factor model to measure the range of risk – PRICE, VOLUME, and VOLATILITY. Friday’s VOLUME was -27% below my immediate-term TRADE duration average. That, combined with a Bullish Formation in VOLATILITY, is bearish for US Equities, from this price.


Across durations, here are the lines that matter most right now: 

  1. TAIL = 1269 (resistance)
  2. TRADE = 1253 (support)
  3. TREND = 1227 (support) 

In other words, watch 1253 today/tomorrow very closely. We think the inflation data (US PPI and CPI) will come in higher than expected (Tuesday/Wednesday). That should keep Bernanke in a box, and upward pressure on the US Dollar.




Keith R. McCullough
Chief Executive Officer


Bearish TAIL: SP500 Levels, Refreshed - SPX

Political Calendar Is Quiet, But Still Important to Keep Front and Center Through Year-End

Below we’ve outlined the key U.S. political events through year-end.  With Congress out of session, the calendar is dominated by appearances from President Obama and the continued series of Republican presidential nominee debates. 


In the shorter term, of course, November 23rdis the deadline for the deficit reduction Super Committee.  Currently, according to InTrade, the odds are 16% that the Super Committee comes to an agreement and issues a recommendation by midnight on November 23rd. We will be publishing a note shortly on the increasingly likely scenario that the Super Committee fails, but that date should be kept in focus.




NOVEMBER 15, 2011

  • Shared Services for Government, Healthcare & Higher Education (Chicago Illinois)
  • CNN / Heritage Foundation / AEI Debate

NOVEMBER 16, 2011

  • Obama visits Australia
    • Discuss expanded military ties

NOVEMBER 18, 2011

  • Obama in Indonesia (17th-19th) for Association of Southeast Asia Nations (ASEAN) Summit

NOVEMBER 19, 2011:

  • Louisiana - Gubernatorial General Election
  • GOP Presidential Forum /Thanksgiving Family Forum (Des Moines, Iowa)
    • Participants: Bachmann, Cain, Gingrich, Paul, Perry and Santorum all confirmed, Romney unconfirmed

NOVEMBER 22, 2011

  • GOP Presidential Debate hosted by CNN (Washington, DC)
  • State unemployment rates for October will be released

NOVEMBER 23, 2011

  • Deadline for super committee to reach a deal, or automatic cuts will immediately be put in place
  • Jobless Claims
  • Consumer Sentiment

NOVEMBER 30, 2011

  • GOP Presidential Debate hosted by Arizona Republican Party and CNN (Mesa, Arizona)
  • Productivity and Costs Release (Q3)

DECEMBER 1, 2011

  • CNN / Arizona GOP Debate

DECEMBER 2, 2011

  • Obama will host 2011 White House Tribal Nations Conference

DECEMBER 8, 2011

  • Deadline for Secretary of State’s office to certify general election results

DECEMBER 10, 2011

  • GOP Presidential Debate hosted by ABC News and the Iowa Republican Party (Des Moines, Iowa)

DECEMBER 12, 2011

  • President Obama welcomes Iraqi Prime Minister Nuri al-Maliki to the White House

DECEMBER 14, 2011

  • President Obama is a confirmed speaker for the Union for Reform Judaism Biennal (14th-18th)

DECEMBER 15, 2011

  • GOP Presidential Debate sponsored by Iowa GOP and Fox News (Sioux, Iowa)
  • Global Conference on Global Business and Global Economy (Detroit, Michigan)

DECEMBER 19, 2011

  • GOP Presidential Debate hosted by the Des Moines Register, PBS NewsHour, Iowa Public Television, Google, and YouTube (Des Moines, Iowa)

DECEMBER 20, 2011

  • State unemployment rates for November will be released

DECEMBER 27, 2011

  • FOX News / Iowa GOP Debate Sioux City, IA

Daryl G. Jones

Director of Research


November GGR forecast revised up to HK$21-22BN



This past week, average daily table revenue increased sharply to HK$781 million versus HK$639 million last week.  We expect the current week to slow again since many VIP players stay away from Macau during the Grand Prix celebration (race is on Saturday).  However, with Cotai somewhat immune to the congestion, the slowdown may not be as pronounced as in prior years and we should see a market share shift away from the peninsula.  We are projecting full month GGR (including slots) of $21-22 billion (+25-31% YoY) with a bias at the high end of that range.


SJM was the clear market share winner, a nice reversal from last year’s hold-affected decline.  We think SJM is holding around 3.5% month to date.  On the low end, MPEL held around 2.5% at both Altira and CoD so far in November, dragging down overall share.  MPEL bears should control their enthusiasm, however.  We think MPEL is on pace for over US$200 million in EBITDA and over US$220 million in hold adjusted EBITDA.  Street consensus is only US$195 million.  









A glut in wheat prices is set to lead prices lower, according to Bloomberg, as exporters fight for sales.  France, in particular, is suffering as Ukraine can export wheat to northern Africa – an important export market for France – as much as $10-15 cheaper than the French can.






THE HBM: DNKN, GMCR, MCD, SBUX, DRI, OSI - subsectors fbr





DNKN: Dunkin’ Brands has announced that JP Morgan, Barclays, and Morgan Stanley are waiving a lock-up restriction with respect to up to 732,758 shares of the company’s common stock.  The waiver will take effect on November 16, 2011, and the shares may be sold on or after such date, subject to the terms of the waiver.

GMCR: Green Mountain Coffee was cut to Hold from Buy at Argus Research.


MCD: McDonald’s aims to “at least” double coffee sales in Germany over the next four years according to the Financial Times Deutschland.


MCD: McDonald’s was maintained overweight at Barclays.


SBUX: Starbucks has raised over $1 million in donations within the first two weeks of its Create Jobs for USA Fund program’s launch.





DRI: Darden featured in Barron’s this weekend where the publication, citing Goldman Sachs research, said the shares could rise to $60 due to a combination of new unit growth on college campuses and airports and pricing. Goldman’s PT is $53.


OSI: OSI Restaurant Partners LLC, parent to Outback Steakhouse, Carrabba’s Italian Grill, Bonefish Grill and other casual-dining chains reported a larger net loss for its third quarter despite strong top-line trends.  Domestic system-wide same-store sales rose 5.6% at Outback Steakhouse during the quarter.



THE HBM: DNKN, GMCR, MCD, SBUX, DRI, OSI - stocks 1114



Howard Penney

Managing Director


Rory Green



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