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Bullish TAIL: SP500 Levels, Refreshed

POSITION: Long Consumer Discretionary (XLY), Long Utilities (XLU)

 

I said that if the SP500 continues to hold my long-term TAIL line of support (1267) that I’d title my notes Bullish TAIL.

 

That doesn’t mean that I won’t make sales and/or call out immediate-term TRADE overbought as it appears in my model. It just means I’m sticking with the risk management process that had me make the bullish turn on US Equities in 2009.

 

Across all 3 risk management durations, here are the lines that matter to me most right here and now: 

  1. Immediate-term TRADE overbought = 1299
  2. Immediate-term TRADE support = 1273
  3. Long-term TAIL support = 1267 

As we pushed higher towards 1299 this morning, I sold my Consumer Staples (XLP) long because that’s the Sector ETF of the 3 I was long coming into today that I like the least. There are no rules against buying it back on red.

 

Keep moving out there,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Bullish TAIL: SP500 Levels, Refreshed - SPX


LIZ: A Gift

 

For those of you who think you’ve missed LIZ, here’s your shot.

 

Classic LIZ. Not even a full quarter elapses since the company reset expectations on the sale of JCP back in October and management is taking its EBITDA outlook for F12 down by $5-$10mm. But there’s more here than meets the eye.

 

We think there are two key factors that make this time different; 1) sales aren’t the issue (unlike the last THREE years), and 2) it is a cost budgeting issue, and LIZ is making headcount changes accordingly as the CFO is leaving the company.

 

To be clear, there is no change to our underlying thesis, which is that this is a 180 degree shift in the characteristics of the company. It is rapidly moving from an unfocused, unprofitable, capital intensive portfolio of marginal brands with meaningful risk of bankruptcy where people stick to price/sales or EBITDA valuation metrics; to being a super-focused portfolio of premium brands, with significantly lower capital requirements, higher margins, and global growth opportunity. In the end, we think that investors will shift meaningfully in sentiment from valuing LIZ on a Sales and EBITDA basis to looking at raw earnings power over a multi-year period.

  1. No company in their right mind would make a revenue call this early in the year. This is all about shared costs as 5th & Pacific kicks off its first year.
  2. The corporate expense line is $70-$75mm as of the last month with ~$15mm in reductions earmarked for next year. Roughly $10mm of that was associated with Mexx and expected to be cut on the front end so the remaining $5mm or so appears to have hit a snag and is either taking longer than expected or is no longer available. We’re fairly confident it’s not the later. This is the element of the equation that management is supposed to have greater visibility on; however, forecast accuracy on the cost side of its business clearly continues to be a challenge.
  3. Therein enters the second half of the announcement that after four years Andy Warren will be stepping down as CFO in March. Our sense is that the transition is a bit less abrupt than it appears in the press release. Simply put, McComb cannot afford for a CFO to be pushed out abruptly. Keep in mind that his own contract comes up for renewal in six months. The last thing he can afford is for the wheels to be falling off the story at that time because six months earlier, a CFO who is long gone left problems tucked away in the closet. McComb needs a nice, peaceful easy smooth transition. One thing is for certain, it will certainly be easier for LIZ to attract quality talent then is was just 4-months ago.

We’re not going to go through the fruitless exercise of what the stock will do today. We’ll let the price speak for itself.


The post-market activity (-8%) puts the stock where it was six days ago (when the re-branding was announced) – before the Street started to bake in the low likelihood that a negative release was not coming at ICR.


In looking at valuation, the $5-$10mm change in F12 EBITDA most likely reflects a delay in execution rather than any real structural change to the underlying fundamental opportunity for $20-$30mm of cost saves over time. That said, we need to acknowledge the reality that it could be $0.50-$1.00 in valuation that is lost forever.


But one thing that is vital here is that THIS IS NOW A GROWTH COMPANY. We are not going to beat up a growth story for averting cost cuts. The only way that Kate can double, then double again, then double again is to invest capital. Same as it relates to taking Juicy global, and continuing to fix Lucky.

 

Would you rather be JNY, who lowered guidance again today and offset a big revenue miss with SG&A cuts? No way. That WILL catch up with them, I can promise you that.


So the bottom line is that if the market freaks out over this, then we say ‘let it.’

 

For the people who have seen this name slip between their fingertips and think that ‘they’ve missed it’, here’s a late holiday gift.


Happy New Year!

 

LIZ: A Gift - LIZ 1Yr Comps

 

LIZ: A Gift - LIZ 2Yr Comps

 

 


THE HBM: BJRI, RT

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Comments from CEO Keith McCullough

 

Being Perma-Anything in Global Macro rarely works:

  1. CHINA – the Shanghai Composite followed up yesterday’s +2.9% gain w/ another boomer of a +2.7% move to the upside overnight, taking Chinese stocks to +3.9% for 2012 YTD. We’re long both China and Hong Kong (CAF and EWH) as we think Growth’s Bottom (a deceleration of the slowdown) may very well be happening in Q112. Bottom’s are processes, not points.
  2. GERMANY – both German Equities and Bunds act very well in the face of Deutsche Bank melting down. Call the Germans whatever you want to call them, but don’t call them the bailout bankers that some Americans became during our banking crisis – these guys are letting prices clear, to a degree, which is impressive. DAX up +2.1% this morn, well above 6045 TRADE line support.
  3. US EQUITIES – the Pain Trade is still up and that’s why I have my highest asset allocation to US Equities in a year (18%); that probably doesn’t make me bullish enough, but it’s better than the alternative – which is staying locked in w/ my 2011 Growth Slowing view. We’ll go through our US scenario for GDP growth accelerating to 2.2-2.8% (consensus = 2.1%) on tomorrow’s Macro Theme Call.

 

SP500’s refreshed range = 1. A close > 1285 would be very bullish as that was the closing high of October 29th.

KM

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: BJRI, RT - subsector fbr

 

 

CASUAL DINING

 

BJRI: BJ’s Restaurants preannounced sales ahead of this week’s ICR Xchange Conference.  Comps rose +5.1% in the fourth quarter.

 

THE HBM: BJRI, RT - BJRI pod 1

 

 

RT: Ruby Tuesday is looking to reverse underperforming same-store sales by increasing television advertising to drive consumers into its upgraded restaurants.

 

 

THE HBM: BJRI, RT - stocks

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


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THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – January 10, 2012


As we look at today’s set up for the S&P 500, the range is 22 points or -0.91% downside to 1269 and 0.80% upside to 1291. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - chart1f

 

THE HEDGEYE DAILY OUTLOOK - CHART2

 

THE HEDGEYE DAILY OUTLOOK - CHART3

 

 

EQUITY SENTIMENT:

 

US EQUITIES – the Pain Trade is still up and that’s why we have our highest asset allocation to US Equities in a year (18%); that probably doesn’t make us bullish enough, but it’s better than the alternative – which is staying locked in w/ our 2011 Growth Slowing view. We’ll go through our US scenario for GDP growth accelerating to 2.2-2.8% (consensus = 2.1%) on tomorrow’s Macro Theme Call.

  • ADVANCE/DECLINE LINE: 812 (+1012) 
  • VOLUME: NYSE 721.88 (1.56%)
  • VIX:  21.07 2.13% YTD PERFORMANCE: -9.96%
  • SPX PUT/CALL RATIO: 2.03 FROM 1.40 (45%)

 

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 57.54
  • 3-MONTH T-BILL YIELD: 0.01%
  • 10-Year: 1.98 from 1.97
  • YIELD CURVE: 1.73 from 1.709

 

MACRO DATA POINTS (Bloomberg Estimates):

  • 7:30am: NFIB Small Business, Dec., est. 93.8 (prior 92.0)
  • 7:45am/8:55am: ICSC/Redbook weekly retail comp sales
  • 10:00am: IBD/TIPP Economic Optimism, Jan., est. 45.3 (prior 42.8)
  • 10:00am: JOLTs Job Openings, Nov.
  • 10:00am: Wholesale Inventories, Nov., est. 0.5% (prior 1.6%)
  • 10:30am: Fed’s Williams to speak on economy in Vancouver, Washington
  • 11:10am: Fed’s Pianalto speaks on labor markets in Ohio
  • 11:30am: U.S. to sell $30b 4-wk, $25b 52-wk bills
  • 1:00pm: U.S. to sell $32b 3-yr notes
  • 1:00pm: Fed’s George speaks on economic outlook in Kansas City

 

WHAT TO WATCH: 

  • U.S. Treasury Secretary Geithner will urge China, Japan to cut Iranian oil imports, seek to narrow differences with China on trade, currency during visits 
  • Bank of New York Mellon close to settling some claims in U.S. lawsuit accusing the bank of overcharging customers for FX trading 
  • Fiat, Chrysler may seek to combine with another automaker to increase efficiencies, CEO Sergio Marchionne said yday
  • Merck says it will make whatever deals are necessary in race for future hepatitis C combination therapies 
  • Intel CEO Paul Otellini holds keynote speech at CES, 7:30pm
  • Bob Evans may lure bids from leveraged buyout firms as cheapest restaurant, Miller Tabak & Co. says
  • New Hampshire holds primaries 
  • JP Morgan Health Care, CES conferences continue
  • No IPOs expected to price: Bloomberg data

 

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)

  •  Biggest Rubber Glut Since 2004 Cuts Michelin Costs: Commodities
  • Oil Rises First Day in Four on Iran Dispute, Euro Debt Meeting
  • Gold Advances in London on Physical Demand, Low Rates Appeal
  • Copper Rises Most in a Week on Record Metal Imports Into China
  • wheat Falls as Stockpiles May Increase; Corn, Soybeans Slide
  • Cocoa Reaches Six-Week High on Demand Outlook; White Sugar Gains
  • la Nina Seen Near Peak as Dryness Parches Argentine Corn
  • Gasoline Supply Reaches 10-Month High in Survey: Energy Markets
  • Youngstown Opens Mills Again as States Jockey for Fracking Jobs
  • Uranium Ban at U.S. Grand Canyon Pits Tourism Against Mining
  • Indonesian Bourse Delays Start of Tin Contract Until Next Month
  • MF Global Customer Sapere Seeks Commodity Customer Priority
  • Shipping Crash Survivor Turning Profit as Fleet Expands: Freight
  • COMMODITIES DAYBOOK: Oil Rises Before Meeting on Europe Crisis
  • Nigeria Strike Halts Cocoa Grading, Transportation From Farms
  • China’s 2011 Soybean Imports Fall First Time in Seven Years
  • Alcoa Has First Quarterly Loss Since 2009 After Prices Drop

 

THE HEDGEYE DAILY OUTLOOK - CHART4

 

 

CURRENCIES

 

THE HEDGEYE DAILY OUTLOOK - CHART5

 

 

EUROPEAN MARKETS


GERMANY – both German Equities and Bunds act very well in the face of Deutsche Bank melting down. Call the Germans whatever you want to call them, but don’t call them the bailout bankers that some Americans became during our banking crisis – these guys are letting prices clear, to a degree, which is impressive. DAX up +2.1% this morn, well above 6045 TRADE line support.


THE HEDGEYE DAILY OUTLOOK - CHART6

 

 

ASIAN MARKETS


CHINA – the Shanghai Composite followed up yesterday’s +2.9% gain w/ another boomer of a +2.7% move to the upside overnight, taking Chinese stocks to +3.9% for 2012 YTD. We’re long both China and Hong Kong (CAF and EWH) as we think Growth’s Bottom (a deceleration of the slowdown) may very well be happening in Q112. Bottom’s are processes, not points.

 

THE HEDGEYE DAILY OUTLOOK - CHART7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - chart8f

 

 

The Hedgeye Macro Team

 


Natural Remedy

This note was originally published at 8am on January 05, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“The market has its own logic and contains its own natural remedy.”

-Nicholas Wapshott

 

That was an excellent paraphrasing of Hayekian thought by Nicholas Wapshott in his recently published “Keynes Hayek.” But who is Hayek and what does Hayekian thought mean?

 

I’m going to make a concerted effort to educate our audience throughout the US Presidential Election on the answers to those very simple questions. Keynesian Dogma is pervasive in our Western education. It has also brought Japanese, European, and US governments to their knees in the last 10 years…

 

Good news: the young people in American who are allowed to Re-think, Re-work, and Re-build this country get that. That’s why you’re seeing a groundswell of a “young” vote for Ron Paul. It may not be as big as Obama’s was – but it’s based on the same American principle of progress – change.

 

To be crystal clear, this doesn’t mean I am some brainwashed disciple of Hayekian economics. It simply means that I have been educated in its alternative and have concluded (like Milton Friedman and Margaret Thatcher did) that it doesn’t work.

 

After the Keynesian experiments of the late 1920s and early 1970s ultimately failed in America, Hayekian thought became a very popular alternatives in both 1931 and 1974.

 

Ultimately, this is why Hayek won (shared) the Nobel Prize in Economics in 1974 and why Milton Friedman went on to become so popular in the 1970s and 1980s (Friedman won the Nobel in 1976).

 

Timing Matters.

 

Hayek: “When I was a young man, only the very old men believed in the free market system. When I was in my middle ages, I myself and nobody else believe in it. And now I have the pleasure of having lived long enough to see that the young people believe in it again.” (Keynes Hayek, pg 258)

 

This time, will not be different.

 

Back to the Global Macro Grind

 

What I have enjoyed most about this stabilization of both volatility (VIX) and US stock market performance in the last few weeks is that it has been driven by the Top Natural Remedy for a country and her economy – the strength and stabilization of her currency.

 

With the US Dollar Index up +0.6% on the day yesterday (up +9.5% since Bernanke signaled the end of Quantitative Easing), the SP500 held flat and Consumer Discretionary stocks (we’re long XLY) closed up +0.8% on the day.

 

Strong Dollar = Strong Consumption. Period.

 

As a reminder, my solution to this mess is to get both the fiscal and monetary central planners out of the way. Big Government Spending (fiscal) will come down via The People’s vote and Easy Money Policy (monetary) that starves conservative US Savers of their hard earned fixed income will come under fire for what it’s been – a short-term policy to inflate.

 

Strong Dollar = Deflates The Inflation. Period.

 

That’s a functional reality in the Post-Keynesian economy, primarily because it’s globally interconnected. Most liquid commodity markets trade/settle on some underpinning of a US Dollar. It’s still the world’s reserve currency.

 

More Good News: the Correlation Risk born out of Congress and Bernanke devaluing the US Dollar to all-time lows twice (2008 and 2011) is NOT perpetual. In other words, get big fiscal and monetary “stimulus” plans out of the way and the correlations in the big stuff that matters start to burn off.

 

What does that mean in English? Let’s use numbers…

 

After having 80-90% inverse correlations to the US Dollar throughout the May-November period of 2011 (Dollar UP = Everything DOWN), here are the latest immediate-term TRADE correlations as of last night:

  1. Gold = -0.93
  2. Copper = -0.69
  3. CRB Commodities Index = -0.69
  4. EuroStoxx Index = -0.57
  5. US Equity Volatility = -0.57
  6. SP500 = -0.02

In other words, the Natural Remedy that convinces the world that we are no longer implicitly trying to devalue our currency lends credibility to the US Dollar and a lower valuations for competing currencies like the Euro and Gold.

 

Additionally, as the US Dollar stabilizes and strengthens:

  1. Commodity Inflation continues to deflate
  2. US Stock Market Volatility starts to fall!
  3. US Stocks that aren’t levered to easy money and/or debt go u

Keynesian Quacks can quibble with me about this all they want – but they’re most likely to do it behind closed doors. Like Keynes vs. Hayek in 1931 or Arthur Burns (Fed Chief) vs. Friedman in 1976, these people are very afraid of the debate – as they should be.

 

As the facts change, America does. Lead, follow, or get out of our way.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, VIX, and the SP500 are now $1590-1639, $111.61-113.37, $1.28-1.30, 20.35-24.11, and 1267-1283, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Natural Remedy - Chart of the Day

 

Natural Remedy - Virtual Portfolio



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