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GPS: 3 Factors Not On Radar Screens

Here are three points that we think are important to keep in context when looking at GPS’ 4Q results.

 

It’s tough to get too excited when a company beats, but still has EPS down 26%. There are three things to consider with GPS…

 

1) The 10% margin guidance target for this year actually might be within a stone’s throw of achievable. It’s so tough to tell with this company given the extreme volatility it sees in its business day to day. But its SIGMA shows a fairly encouraging trend after building inventories throughout the past eight quarters. BUT, the wildcard still remains in JC Penney’s hands. We’re already seeing stepped-up promotional cadence at JCP and KSS. More mid-tier retailers (even Macy’s mid-tier) will follow. To think that this won’t impact GPS is downright wreckless.

 

GPS: 3 Factors Not On Radar Screens - GPS SIGMA

 

2) We get the whole Lampert-esque stock buyback model here. But the reality is that GPS is almost out of gas. Having net cash of $1.5-$2bn and buying $1bn each year is a pretty good place to be. But GPS is flirting with having net debt as opposed to cash. The company announced a new $1bn program yesterday, but we’d be surprised if it executed on it.

 

GPS: 3 Factors Not On Radar Screens - GPS cash

 

3) Longer-term margins: I can give a dozen reasons why any kind of respectable margin GPS printed in the past is no longer a reality. But the best chart I can show is below. It shows GPS’ employee count versus operating margin. This is a human capital business – think sales, marketing, R&D, etc… Good companies invest into their infrastructures in order to (re)gain share.  Gap has taken its employee base down by 20,000 employees (13%) over four years.  You want a 12% margin again? Find me 20,000 employees. That’ll cost about $1.2bn, or $1.45 per share. Then that’s GPS’ new base to grow from. Perhaps I’m oversimplifying this. But directionally, it’s spot on.

 

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THE HBM: YUM, MCD, COSI, DRI

THE HEDGEYE BREAKFAST MONITOR

 

MACRO NOTES

 

Comments from CEO Keith McCullough

 

I couldn’t make up this #1 Headline on Bloomberg this morn if I tried – “STOCKS, OIL CLIMB ON GLOBAL ECONOMIC RECOVERY”:

  1. RUSSIA – which is obviously a PetroDollar Equity market continues to rage higher as inflation expectations do. The RTSI is up another +2.4% this morning and +22% for the YTD as President Obama blames oil rising on “Wall Street Speculators” (dollar down be damned)
  2. COPPER – the Doctor just doesn’t agree with this manic media headline at all – neither does the 10yr UST yield – both are failing at critical lines of resistance of $3.85/lb and 2.03%, respectively, this morning. Those who confuse inflation with growth will be doing it for the 3rd time since 2008.
  3. YEN – How one of the world’s top 3 currencies can collapse like this and it not be called out by consensus is far beyond my reach. The Yen is down -6% for the month-to-date! Its not a straight line down, but its close – reminds me of the Euro falling off its highs in April of 2011 and consensus saying “hey, buy European exporters!” – we continue to see this sov debt maturity spike (March) in Japan as the why on Yen…

I’m net long equities for this morning’s open and I shouldn’t be. High Frequency Gambling at this pt.

 

 

SUBSECTOR PERFORMANCE

 

THE HBM: YUM, MCD, COSI, DRI - subsecotr 1

 

 

QUICK SERVICE

 

YUM: Yum’s Taco Bell will debut a new marketing campaign this weekend centered on a new “Live Más” slogan.

 

MCD: McDonald’s is offering the McBaguette in France; a Charolais burger served on a baguette.

 

COSI: Cosi has regained compliance with Nasdaq listing standards.

 

 

NOTABLE PERFORMANCE ON ACCELERATING VOLUME:

 

SONC:  No news hitting the tape but we believe that SONC is a big beneficiary of weather this year – the weekend of February 5thsaw Texas covered with snow from the Rio Grande to the Oklahoma border.

 

THI: Tim Hortons gained 4% on accelerating volume thanks to strong earnings hitting the tape yesterday before market open.

 

JACK: Jack in the Box declined on earnings.

 

 

CASUAL DINING

 

DRI: Darden is hosting its Analyst Day in NYC today.  In an interview with CNBC yesterday, CEO Clarence Otis said that shrimp costs are up and also that he sees good fundamentals at Olive Garden.

 

THE HBM: YUM, MCD, COSI, DRI - stocks

 

 

Howard Penney

Managing Director

 

Rory Green

Analyst

 


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

THE HEDGEYE DAILY OUTLOOK

TODAY’S S&P 500 SET-UP – February 24, 2012


As we look at today’s set up for the S&P 500, the range is 15 points or -0.69% downside to 1354 and 0.41% upside to 1369. 

 

SECTOR AND GLOBAL PERFORMANCE

 

THE HEDGEYE DAILY OUTLOOK - 1

 

THE HEDGEYE DAILY OUTLOOK - 2

 

THE HEDGEYE DAILY OUTLOOK - 3

 

 

EQUITY SENTIMENT:

  • ADVANCE/DECLINE LINE: 1314 (-1906) 
  • VOLUME: NYSE 763.09 (4.67%)
  • VIX:  16.80 -7.64% YTD PERFORMANCE: -28.21%
  • SPX PUT/CALL RATIO: 2.12 from 2.15 (-1.40%)

CREDIT/ECONOMIC MARKET LOOK:

  • TED SPREAD: 40.42
  • 3-MONTH T-BILL YIELD: 0.09%
  • 10-Year: 2.00 from 2.00
  • YIELD CURVE: 1.70 from 1.70 

MACRO DATA POINTS (Bloomberg Estimates):

  • 9:55am: UMichigan Consumer, Feb (F), est. 73 (prior 72.5)
  • 10:00am: New Home Sales, Jan., est. 315k, up 2.6% (prior 307k)
  • 10:45am: Fed’s Williams speaks in New York
  • 11:35am: Fed’s Bullard speaks on housing, monetary policy in New York
  • 1pm: Baker Hughes rig count
  • 1:30pm: Fed’s Plosser, Dudley speak on monetary policy in New York 

GOVERNMENT:

    • President Obama meets with Danish PM Helle Thorning-Schmidt to discuss European debt crisis in Chicago
    • U.S. Dept of Agriculture discusses crop outlook
    • Mitt Romney addresses Detroit Economic Club, 11:30am
    • House, Senate meet in pro forma sessions
    • NRC advisory panel meets to consider NextEra Energy Inc.’s Turkey Point extended power application, 8:30am
    • FCC meets on provisions of National Broadband plan, 9am    

WHAT TO WATCH: 

  • Apollo Global, others said to be near deal to acquire El Paso’s oil-exploration business for about $7b
  • Purchases of new homes in U.S. probably rose 2.6% in January to a nine-month high, economists est.
  • Bank of America is stopping sale of new home loans to Fannie Mae
  • Wynn Resorts’s Macau unit ejected Kazuo Okada from its board; Phillipine President Aquino orders probe
  • Lloyds posted full-year net loss that missed est.; Volkswagen reported record profit
  • U.K. GDP shrank 0.2% in 4Q, in line with forecast
  • Apple said to buy search startup Chomp for $50m
  • Watch Watson Pharma; last business day before Feb. 26 PDUFA decision date on Prochieve for prevention of preterm labor
  • G-20 finance ministers, central bank presidents to meet in Mexico City this weekend
  • Warren Buffett to release annual letter to Berkshire Hathaway shareholders tomorrow 

EARNINGS

    • Enerplus (ERF CN) 6 a.m., C$0.23
    • Alpha Natural Resources (ANR) 7 a.m., $0.26
    • Endo Pharmaceuticals Holdings (ENDP) 7 a.m., $1.32
    • Interpublic Group (IPG) 7 a.m., $0.39
    • Pepco Holdings (POM) 7 a.m., $0.19
    • Telephone & Data Systems (TDS) 7 a.m., $0.25
    • Warner Chilcott (WCRX) 7 a.m., $0.90
    • United States Cellular (USM) 7:04 a.m., $0.24
    • Eldorado Gold (ELD CN) 7:30 a.m., $0.20
    • EW Scripps (SSP) 7:30 a.m., $0.10
    • J.C. Penney (JCP) 7:50 a.m., $0.67
    • Pinnacle West Capital (PNW) 8 a.m., $0.04
    • Washington Post (WPO), 8:30am, NA
    • American Water Works (AWK) 4:30 p.m., $0.33    

COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)


We couldn’t make up this #1 Headline on Bloomberg this morning if we tried – “STOCKS, OIL CLIMB ON GLOBAL ECONOMIC RECOVERY”

 

COPPER – the Doctor just doesn’t agree with this manic media headline at all – neither does the 10yr UST yield – both are failing at critical lines of resistance of $3.85/lb and 2.03%, respectively, this morning. Those who confuse inflation with growth will be doing it for the 3rd time since 2008. 

  • Copper Traders Most Bullish in Two Months on Demand: Commodities
  • U.S. Soybean Output May Rise to 3.25 Billion Bushels, USDA Says
  • Oil Rises a Seventh Day in Longest Winning Streak in Two Years
  • Gold May Gain in London as Weaker Dollar Spurs Investor Demand
  • Corn Declines as U.S. Acreage Expands, Ukraine Sales to Climb
  • Oenophile Chinese Purchase Bordeaux for $470 Mainland Bottles
  • Copper Heads for First Weekly Gain in Three Before U.S. Data
  • Rubber Caps Best Gain in Five Weeks as Oil Rally Boosts Appeal
  • Statoil $1.2 Billion Tanzania Find May Hold Oil in New Play
  • Billionaires Vie for Railway to $40 Billion Coal Region: Energy
  • Glencore Will Notify EU of Xstrata Bid for Merger Review
  • Baosteel Spurs Dim Sum Revival on Cost Advantage: China Credit
  • Mentor of Central Bankers Fischer Rues Complacency in New Growth
  • Billionaires Vie for Australian Coal Rail
  • Gold’s Bull Run May Drive Price to $5,000, Wyke Forecasts
  • Cotton Exports From India Slows as Crisis Cools Apparel Demand
  • U.S. Corn Crop May Reach Record 14.27 Billion Bushels, USDA Says 

THE HEDGEYE DAILY OUTLOOK - 4

 

 

CURRENCIES


THE HEDGEYE DAILY OUTLOOK - 5

 

 

EUROPEAN MARKETS


RUSSIA – which is obviously a PetroDollar Equity market continues to rage higher as inflation expectations do. The RTSI is up another +2.4% this morning and +22% for the YTD as President Obama blames oil rising on “Wall Street Speculators” (dollar down be damned).


THE HEDGEYE DAILY OUTLOOK - 6

 

 

ASIAN MARKETS


YEN – How one of the world’s top 3 currencies can collapse like this and it not be called out by consensus is far beyond my reach. The Yen is down -6% for the month-to-date! It’s not a straight line down, but its close – reminds me of the Euro falling off its highs in April of 2011 and consensus saying “hey, buy European exporters!” – we continue to see this sovereign debt maturity spike (March) in Japan as the why on Yen…

 

THE HEDGEYE DAILY OUTLOOK - 7

 

 

MIDDLE EAST


THE HEDGEYE DAILY OUTLOOK - 8

 

 

 

The Hedgeye Macro Team

 


Realist Risk Managers

This note was originally published at 8am on February 10, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“You have to be realistic even if you’re an idealist.”

-Izzeldin Abuelaish

 

Ideally, the US stock market would never go down (its biggest down day of 2012 = -0.57%). Realistically, that’s not going to happen.

 

Ideally, you can wrap a Global Macro Risk Management Process up in a baby blue Tiffany box and slap a white ‘here’s what will happen in 2012’ bow on it for your clients. Realistically, you need to do the opposite of that and Embrace Uncertainty, every day.

 

The aforementioned quote comes from a book I am in the middle of reading right now called “I Shall Not Hate” – a Gaza Doctor’s story about managing life’s risks – those that are far greater than that of a Greek politician’s career this morning.

 

Back to the Global Macro Grind

 

After spending the last few days risk managing with some of our most thoughtful clients in Boston, I came to the simple conclusion that Greece has become a tree within a forest of globally interconnected risks.

 

The deep simplicity of that conclusion shouldn’t be a surprise. What’s happening to the rest of the world’s Growth and Inflation Expectations certainly didn’t cease to exist because the manic media doesn’t have an analytical process to absorb it.

 

The Top 3 Risk Management Topics our clients wanted to focus on in the last few days had nothing to do with Greece:

  1. Japan’s Sovereign Debt Maturity spike in March
  2. China’s Inflation Rising Post #BernankTax
  3. Down Dollar = Rising Inflation = Slowing Growth

Unlike some pundit spewing their qualitative views, a Realist Risk Manager (a Buy-Sider) is held accountable to real-time risk ticking on their screen every hour of every day. Being early in this business can also mean being wrong. Being late can also mean you blow up.

 

Maybe that’s why Japan was such a hot topic on the road. People are no longer allowed to blow up. Blowing up client moneys in 2008 was, allegedly, what “everyone” (other than those of us who didn’t) missed. Getting tagged for another -10-50% loss of capital in 2011, for some, made 2008 + 2011 a trend. And a 3rdtime probably means prepping your resume for an interview at Chipotle.

 

Why Japan? Why now?

 

We’ve been making this call since 2010, “The Sovereign Debt Dichotomy”, which attempts to simplify trading the short side of stock markets (long CDS) by waiting and watching for the Keynesian policy makers of that country to bump up against the biggest sovereign debt maturity within their economic region. Timing is critical.

 

That’s why we got bearish on Spain, then Italy, then France – in that order – in the order that their respective monthly sovereign debt maturities ballooned. After their stock markets imploded, we covered and got out of the way.

 

In today’s Chart of The Day, you’ll see that Japan’s March Debt Maturity Spike is:

  1. The largest, nominally, that Japan will ever have to bring to market
  2. Larger than any other European debt maturity by a considerable margin

Every client pushed our lynx-eyed Asia analyst, Darius Dale, and I on the next obvious question – why aren’t Japanese spreads and CDS blowing out yet?

 

A: throughout the entire European Sovereign Debt crisis, they didn’t either. They started to when it became clear to the market that their largest maturities couldn’t be absorbed at lower/stable yields.

 

Ideally, everyone would be able to price everything’s risk, efficiently, in real-time. Realistically, markets don’t trade that way. They trade on the expectations and emotions associated with last price.

 

Sometimes markets don’t go down, literally, until the day of the “new news”. Look at China in the last 48 hours:

  1. Inflation Rising = Consumer Price Inflation (CPI) up to 4.5% y/y (versus 4.1% last month)
  2. Growth Slowing = Chinese Exports down -0.5% y/y (down y/y for the first time in 2 years)

On that “news” this morning, US centric stock market investors who are still staring at the tree (Greece), now have to react to “China Slowing” as a Top 3 Most Read Bloomberg story. Unlike the US stock market, which has not yet had a -1% down day in 2012, Hong Kong was down -1.1% on that (Indonesia -1.7%, South Korea -1.3%, etc.).

 

Ideally, I’d like to sleep once in a while. Realistically, that’s not going to happen either. Global Macro market risk never sleeps.

 

My immediate-term support and resistance ranges for Gold, Oil (Brent), EUR/USD, Shanghai Composite, France CAC, and the SP500 are now $1717-1761, $114.12-119.02, $1.31-1.33, 2319-2357, 3391-3565, and 1334-1360, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Realist Risk Managers - Chart of the Day

 

Realist Risk Managers - Virtual Portfolio



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